LIQUIDITY MANAGEMENT OF GLOBAL

IME BANK LIMITED

A Project Work Report

Submitted by:
Prashanna Gautam
Gyankunj College
T.U. Registration Number. 7-2-548-42-2013
Exam Roll No.

Submitted to:
The Faculty of Management
Tribhuvan University
Kathmandu

In Partial fulfilment of the requirement for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)

Ravibhawan, Kathmandu, Nepal

May 2020
 DECLARATION

I hereby declare that the project work entitled Liquidity Management of Global IME Bank
Ltd. submitted to the Faculty of Management, Tribhuvan University, Kathmandu is an original
piece of work under the supervision of Dr. Ram Prasad Parajuli, faculty member, Gyankunj
College, Ravibhawan, Kathmandu, and is submitted in partial fulfilment of the requirement for
the degree of Bachelor of Business Studies (BBS). This project work has not been submitted
to any other university or institution for the award of any degree or diploma.

Prashanna Gautam
May 2020

ii
SUPERVISOR’S RECOMMENDATION

iii
ENDORSEMENT

iv
 ACKNOWLEDGEMENT

I would like to express my deep gratitude to Gyankunj College, Ravibhawan, Kathmandu for
allowing to carry out this project work in partial fulfilment of the requirement of Bachelor of
Business Studies (BBS).

I would like to express my sincere thanks to my respected thesis work supervisor Dr. Ram
Prasad Parajuli, Gyankunj College, who assisted me in finalizing this project work.

I wish to extend my gratitude to campus Chief Mr. Ganesh Prasad Koirala and Head of
Research Department Dr. Ram Prasad Parajuli for their valuable advice, suggestion and co-
operation to carry out this project work.

Prashanna Gautam
Gyankunj College
7-2-548-42-2013

v
 TABLE OF CONTENTS
Title Page ................................................................................................................................................. i
Declaration ............................................................................................................................................. ii
Supervisor’s Recommendation............................................................................................................... iii
Endorsement .......................................................................................................................................... iv
Acknowledgement ................................................................................................................................... v
Table of Contents ................................................................................................................................... vi
List of Tables ......................................................................................................................................... vii
List of Figures ...................................................................................................................................... viii
Abbreviations ......................................................................................................................................... ix
CHAPTER I: INTRODUCTION ...................................................................................................... 1
Background ................................................................................................................... 1
Profile of the Bank ........................................................................................................ 7
Objective ....................................................................................................................... 9
Rationale ..................................................................................................................... 10
Review ........................................................................................................................ 10
Methods ...................................................................................................................... 17
Limitations .................................................................................................................. 21
CHAPTER II: RESULTS AND ANALYSIS.................................................................................... 22
Data Presentation and Analysis .................................................................................. 22
Findings ...................................................................................................................... 28
CHAPTER III:SUMMARY AND CONCLUSION ......................................................................... 29
Summary ..................................................................................................................... 29
Conclusion .................................................................................................................. 29
BIBLIOGRAPHY ............................................................................................................................... 31

vi
 LIST OF TABLES

Table Page No.

Table 1.1: Current Ratio .......................................................................................................... 23

Table 1.2: Cash Ratio ............................................................................................................... 24

Table 1.3: Loan to Deposit Ratio ............................................................................................. 25

Table 1.4: Cash and Bank to Deposit Ratio ............................................................................. 26

Table 1.5: Fixed Deposit to Total Deposit Ratio ..................................................................... 27

vii
 LIST OF FIGURES

Table Page No.

Figure 1.1: Current Ratio ......................................................................................................... 23

Figure 1.2: Cash Ratio ............................................................................................................. 24

Figure 1.3: Loan to Deposit Ratio............................................................................................ 25

Figure 1.4: Cash and Bank to Deposit Ratio............................................................................ 26

Figure 1.5: Fixed Deposit to Total Deposit Ratio .................................................................... 27

viii
 ABBREVIATIONS

A.D. Anno Domini

ALM Asset Liability Management
B.S. Bikram Sambat
BCBS Basel Committee on Banking Supervision
CFP Contingency Funding Plans
Co. Company
DRS Disaster Recovery System
F/Y Financial Year
FD Fixed Deposit
GFC Global Financial Crisis
GIBL Global IME Bank Ltd.
i.e. That is
IME International Money Express Group
LDR Loan to Deposit Ratio
LTD Loan to Deposit Ratio
Ltd. Limited
MBS Master of Business Studies
NRB Nepal Rastra Bank
NPR Nepalese Rupees
SME Small and Medium Enterprises
Viz. Namely

ix
 1

CHAPTER I: INTRODUCTION

1.1 Background of the Study

Introduction

“Banking is the kingpin of the chariot of economic progress”, (C. H. Bhabha).

Banking is a long-established and honourable profession. The provision of efficient loan and
deposit facilities is an essential ingredient in human development and prosperity. For this
reason, it is important that all banks are managed prudently. The art of banking remains
unchanged from when banks were first established. Today, it encompasses a wide range of
activities of varying degrees of complexity. Whatever the precise business undertaken by
specific individual banks, the common denominator of all banking activities is that of bringing
together those who require funding with those who possess surplus funding, and acting as a
transmission mechanism for the processing of payments. Societal and economic development
worldwide relies on efficient banking service provision. The basic bank business model has
remained unchanged ever since banks became an integral part of modern society. Of course, as
it is more of an art than a science, the model parameters themselves can be set to suit the specific
strategy of the individual bank, depending on whether the strategy operates at a higher or lower
risk–reward profile. However, the basic model is identical across all banks. In essence, banking
involves taking risks, followed by effective management of that risk. At its core are the two
principles of asset–liability mismatch and liquidity risk management. The act of undertaking
loans and deposits creates the mismatch, because while investors like to lend for as short a term
as possible, borrowers prefer to borrow for as long a term as possible. In other words, the act
of banking is the process of maturity transformation, whereby banks “lend long” and “fund
short”. Banks do not “match-fund”, because there would never be enough funds available to
match a 25-year maturity mortgage with a 25-year fixed deposit. Thus, banking gives rise to
liquidity risk, and bankers are therefore required to take steps to ensure that liquidity, the ability
to roll over funding of long-dated loans, is continuously available.

We define banking as the provision of loans and deposits; the former produce interest income
for the bank, while the latter create interest expense for the bank. On the bank’s balance sheet
the loan is the asset and the deposit is the liability, and the bank acts as the intermediary
 2

between borrowers and lenders. The fact that all banks, irrespective of their size, approach, or
strategy, must manage the two basic principles of asset–liability management (ALM) and
liquidity management means that they are ultimately identical institutions. They deal within
the same markets and with each other. That means that the bankruptcy of any one bank, while
serious for its customers and creditors, can have a bigger impact still on the wider economy
because of the risk this poses to other banks. It is this systemic risk which posed the danger for
the world’s economies in 2008, after Lehman Brothers collapsed, and which remains a
challenge for financial regulators.

The critical issue for bank management, is that some of the assumptions behind the application
of the fundamentals have changed, as demonstrated by the crash of 2007–2008. The changed
landscape in the wake of the crisis has resulted in some hitherto “safe” or profitable business
lines being viewed as risky. Although favourable conditions for banking may well return in
due course, for the foreseeable future the challenge for banks will be to set their strategy only
after first arriving at a true and full understanding of economic conditions as they exist today.
The first subject for discussion is to consider what a realistic, sustainable return on the capital
target level should be and to ensure that it commensurate with the level of risk aversion desired
by the Board. The Board should also consider the bank’s capital availability and what amount
of business this could realistically support. These two issues need to be addressed before the
remainder of the bank’s strategy can be considered. (Choudhry, 2018).

Development of Banking in Nepal

The banking system of Nepal began in 1937 with the establishment of the Nepal Bank Ltd. as
the first commercial bank of Nepal with the joint ownership of government and general public.
Nepal Rastra Bank was established after 19 years since the establishment of the first
commercial bank. A decade after the establishment of NRB, Rastriya Banijya Bank, a
commercial bank under the ownership of Government of Nepal was established. The NRB
regulates the national banking system and also functions as the government’s central bank. As
a regulator, NRB controls foreign exchange; supervises, monitors, and governs operations of
banking and non-banking financial institutions; determines interest rates for commercial loans
and deposits; and also determines exchange rates of foreign currencies. As the government’s
bank, NRB maintains all government income and expenditure accounts, issues Nepali bills and
treasury notes, as well as loans to the government, and determines monetary policy.
 3

In the context of banking development, the 1980s saw a major structural change in financial
sector policies, regulations and institutional developments. Government emphasized the role
of the private sector for investment in the financial sector. With the adoption of the financial
sector liberalization by the government in 80's, the door opened for foreign banks to open Joint
Venture Banks in Nepal. As a result, various banking and non-banking financial institutions
have come into existence. Nabil Bank Limited, the first foreign joint venture bank of Nepal,
started operation in July 1984. During two decades, Nepal witnessed tremendous increment in
number of financial institutions. Nepalese banking system has now a wide geographic reach
and institutional diversification. Consequently, by the mid of Jan 2020, altogether 176 banking
and non - banking financial institutions licensed by NRB are in operation. Out of them, 27 are
“A” class Commercial Banks, 24 “B” class Development Banks, 22 “C” class Finance
Companies, 90 “D” class Microfinance Financial Institutions, 12 Other Institutions and one
Infrastructure Development Bank. (www.nrb.org.np).

Liquidity Management

The primary objective of banking business is to accept deposits and make loans. As the
developments are taking a much faster pace than ever before in the history, banking business
are also expanding their operations at a huge level. Contemporary development towards a
prosperous society might be aesthetic on one front yet carrying its own hurdles. Banking
business is a no averted class from the myriads of complications that arise because of unlimited
choices we have. The role of Liquidity Management comes into play when we have limited
resources to handle the quantum of transactions. Liquidity management is a concept that is
receiving serious attention all over the world especially with the current financial situations
and the state of the world economy. The concern of business owners and managers all over the
world is to devise a strategy of managing their day to day operations in order to meet their
obligations as they fall due and increase profitability and shareholder’s wealth.

Liquidity is a financial institution’s capacity to meet it cash and collateral obligations as they
fall due without incurring unacceptable losses. While assessing the institution’s capability to
meet its expected cash flows, the considerations shall also be given to unexpected cash flows
and collateral needs. Liquidity management should not in itself adversely affect the daily
operations or the financial condition of the institution. Therefore, liquidity management
involves the supply/withdrawal from the market the amount of liquidity consistent with the
desired level of short-term interest or reserve money. It is the ability of an institution to meet
 4

demands for funds thereby ensuring that the institution maintain sufficient cash and liquid
assets to satisfy client demand for loans and savings withdrawals and then meet its expected
expenses. Primarily, the role of liquidity management is to prospectively assess the needs for
funds to meet obligation and ensure the availability of cash or collateral to fulfil those need at
the appropriate time by coordinating the various sources of funds available to the institution
under normal and stressed conditions. It relies on the daily assessment of the liquidity
conditions in the banking system, so as to determine its liquidity needs and thus the volume of
liquidity to allot or withdraw from the market. Management of liquidity involves a daily
analysis and detailed estimation of the size and timing of cash inflows and outflows over the
coming days and weeks to minimize the risk that savers will be unable to access their deposits
in the moment they demand it. Thus, liquidity is lifeblood of a banking system. The objective
of liquidity management is to gear banks towards a financial position that enables them to meet
their financial obligations as they arise. Lack of adequate liquidity in a bank is often
characterized by the inability to meet daily financial obligations. At time it may have the risk
of losing deposits which erodes its supply of cash and thus forces the institution into disposal
of its more liquid assets. Managing monies of a firm in order to maximize cash availability and
interest income on any idle cash is a function of liquidity management. (Pandey, 2018).

Consequently, within the financial system three broad types of liquidity exist: Central Bank
liquidity, Funding liquidity and Market liquidity. The ability of central bank to supply liquidity
needed in a financial system is called Central Bank liquidity. The Basel Committee on Banking
Supervision (BCBS) defines Funding liquidity, as the ability of banks to meet their liabilities,
unwind or settle their positions as they fall due. Market liquidity relates to the capacity to trade
an asset in the market at short notice, at low cost and with little impact on its price.

Finance in a banking system is like the blood in the human system, adequate circulation of this
blood in the body means the human system will function well resulting into good health. And
the inadequacy will also mean that human system will be weak. Similarly, business can only
operate under the state of adequate liquidity. A company is said to be liquid, if it can convert
its asset to cash with minimum amount of delay and inconvenience. The optimum capital
structure is determined by keeping in mind the long-term and short-term requirements of
finance. Liquidity is the speed and ease with which an asset is sold and still realizes fair price.
Therefore liquidity is seen as the inflows and outflows of cash through the firm as product
acquisition, sales payment and collection processes taking place over time, with which asset
 5

can be converted into cash without a significant loss of principal liquid asset. It is a relationship
between the fine dimension (how long it will take to sell) and the price dimension (The discount
from fair market price) of an investment asset. Hence, a firm should ensure it does not suffer
from lack of liquidity and does not also have excess liquidity. Failure to meet obligation due to
lack of sufficient liquidity results in poor credit worthiness and loss of creditors’ confidence.
However, a high degree of liquidity results in idle cash. Thus, liquidity management as a
concept encompasses efficient and effective planning and organization of Bank’s assets which
will enhance its liquidity and profitability at a minimum cost possible.

Banks derive their liquidity from the following sources: vault cash, balances held with NRB,
balances held with offices & branches outside Nepal, money at call in Nepal, inter-bank
placement, placement with discount houses, treasury bills, treasury certificates, investment in
stabilization securities, bills discounted payable in Nepal, Negotiable certificates of deposits,
bankers acceptances and commercial papers. The viability of banks can be directly linked to
their liquidity management. Hence the ability to ensure that there is availability of funds to
meet its financial commitments or maturing obligations at a reasonable price at all times.
Deposit mobilization is one of the most important functions of banks. This enables deposits to
be mobilized which otherwise would have remained idle and unproductive in the surplus
economic unit. Also important is the need for adequate income through interest on loan as this
will ensure continued provision of productive resources. Therefore it is uneconomic and
financially unreasonable for banks to allow excess idle cash in the vault or excess liquidity.
Rather, they should manage their liquidity to maximize revenues while holding risks of
insolvency at a desired level.

Liquidity management refers to the planning and control of liquid assets either as an obligation
to the customers financial needs or as a measure to adhere to the monetary policies of the Nepal
Rastra Bank. For a commercial bank to plan or manage its liquidity, it must comply firstly with
the legal requirement concerning its cash position. However, it is very essential for banks to
manage and maintain adequate funds for operations in order to avoid excesses or deficiencies
of the required primary reserves. Where there is a decline in the market price of securities or
where additional funds needed to correct the bank reserve position are for a short time, it will
be expensive to secure securities than to borrow from another bank. It may be more desirable
to borrow for bank’s liquidity needs than to call back outstanding loan or cancel out rightly or
place embargo on new loans, a situation that will reduce the customer confidence in the bank.
 6

Effective liquidity management therefore involves obtaining full utilization of all reserves
available with the commercial banks. The primary reserves are made of vault cash, cash
balances or excess reserves with the NRB, as well as deposits with other banks, both locally
and abroad. They are maintained to satisfy legal and operational requirements. While the
secondary reserves are those liquid assets that can be converted into cash without impairment
of the principal sum invested. Secondary reserves are characterized by short maturity, high
credit quality and high marketability. The secondary reserves are held primarily to meet both
anticipated and unanticipated short-term and seasonal cash needs from depositors. They
contribute to that attainment of both profitability and liquidity objective of the bank.

Liquidity Risk is intrinsic to the banking business as the main role of banks in the financial
system is to provide liquidity through intermediation. During the Global Financial Crisis (GFC)
which began in the United States (US) in late 2007, albeit with relatively high capital levels,
many banks faced difficulties because they had failed to manage liquidity properly. Banks were
not vigilant enough to notice and address the increasing defaults in the United States subprime
home mortgage sector. Many of commercial banks relied on government support to avoid
bankruptcy. These events highlighted the importance of liquidity risk management in the
functioning of the banking sector and spurred regulators and policy makers to pay special
attention to liquidity and its risk management in the banking industry. This interest became
urgent during the GFC because the liquidity shortfall in one bank was able to infect and
destabilize the entire financial system worldwide, since a collapse in confidence in one
institution was likely to spread to all others seen as exposed to the same or similar problems.
Therefore, studying and understanding liquidity is a very important topic, especially for banks,
given that they act as liquidity providers and financial intermediaries in the financial system.
(Chiaramonte, 2018).

Ben Bernanke, Chairman of the Federal Reserve reflects on the GFC, one year later, “In
particular, the experience has underscored that liquidity risk management is as essential as
capital adequacy and credit and market risk management, particularly during times of intense
financial stress.

Among other objectives, liquidity guidelines must take into account the risks that inadequate
liquidity planning by major financial firms pose for the broader financial system, and they must
ensure that these firms do not become excessively reliant on liquidity support from the central
bank.” (Bernanke, 2009).
 7

1.2 Profile of Global IME Bank Limited

Global IME Bank Ltd. (GIBL) emerged after successful merger of Global Bank Ltd (an “A”
class commercial bank), IME Financial Institution (a “C” class finance company) and Lord
Buddha Finance Ltd. (a “C” class finance company) in year 2012. Two more “B” class
development banks (Social Development Bank and Gulmi Bikas Bank) merged with Global
IME Bank Ltd in year 2013. Later, in the year 2014, Global IME Bank made another merger
with Commerz and Trust Bank Nepal Ltd. (an “A” class commercial bank). During 2015-16,
Global IME Bank Limited acquired Pacific Development Bank Limited (a "B" Class
Development Bank) and Reliable Development Bank Limited (a "B" Class Development
Bank). During 2019-20, Global IME Bank Limited acquired Hathway Finance Limited (a “C”
class finance company) and merged with Janata Bank Nepal Limited (an “A” class commercial
bank).

Global Bank Limited (GBL) was established in 2007 as an ‘A’ class commercial bank in Nepal
which provided entire commercial banking services. The bank was established with the largest
capital base at the time with paid up capital of NPR 1 billion. The paid up capital of the bank
has since been increased to NPR 18.97 billion. The bank's shares are publicly traded as an 'A'
category company in the Nepal Stock Exchange. It is in line with the aim of the bank to be “The
Bank for All” by giving necessary impetus to the economy through world class banking
service. For the day to day operations, the bank has been using the world renowned FINACLE
software that provides real time access to customer database across all branches and corporate
locations of the bank. This state of the art customer database has also been linked to a
Management Information System that provides easy reach to all possible database information
for balanced and informed decision making. A disaster recovery system (DRS) of the Bank
has also been established in the Western Region of Nepal (200 kilometres west of Kathmandu).

The bank has been able to achieve excellent diversification of its assets. A well balanced
distribution of exposure in areas of national interest has been possible through long term
forecasting and timely strategic planning. The bank has diversified interests in hydro power,
manufacturing, textiles, services industry, aviation, exports, trading and microfinance projects,
just to mention a few. The exemplary performance of the bank in these last eleven years has
elevated it to a premier status in the industry. The bank has been handling government
transactions and is officially among one of the few commercial banks trusted by the
 8

Government in handing Government revenue transactions of various offices. The bank has
been able to earn the trust and confidence of the public, which is reflected in the large and ever
expanding customer base with more than 2,000,000 number of accounts in deposit base and
above 50,000 in credit. Through all this the bank has been able to truly achieve its vision of
being “The Bank for All”. Even with all this success, the bank remains internally focused
towards manpower development, product innovation and process innovation etc., to have a
strong and solid foundation, which are ongoing and continuous improvement initiatives
undertaken by the management and staff alike.

GIBL has been promoted by a group of prominent indigenous entrepreneurs who have written
a history of success in their field of ever growing business. The promoters of the bank include
renowned, well established and respected businessmen/industrialists in Nepal from a variety of
different sectors that include finance, remittance, trading, export, automotive services,
manufacturing, media services and hydropower to name a few. The collective experience of
the promoters have been realized to customize the bank's offerings and services to compete
with best in the banking industry and in still a culture based on our core values of integrity,
business ethics, teamwork, respect, humility, professionalism, loyalty and good governance.
Authorized Capital of Global IME Bank is NPR 25,000 million and Paid up Capital is NPR
18,975.87 million.

The bank offers a complete range of banking products in deposits, lending, trade finance and
remittances. The bank’s deposit product portfolio encompasses customer tailored saving
deposits, fixed deposits, call and current deposits. The lending product portfolio includes
commercial loan products such as demand loans, cash credits, overdrafts, trust receipts and
term loans, whereas a complete portfolio of personal and retail credit products are also provided
by the bank. Non-fund based products such as bank guarantees and letters of credit are also
available to the bank’s customers. GIBL's focus has been stretched out to financial supports to
Corporate and Infrastructure Sectors with preference on renewal energy, SME, Retail and
Micro Financing Loans. In continuation of living with its vision “The Bank for All”, the bank
has launched Agricultural Loan in co-ordination with food processing industries as about 70%
of the Nepalese population depend on agriculture for their livelihood.

In addition to the above, the bank also offers a variety of value added services to its customers.
The bank has also been providing Internet/Mobile Banking Services (through its website
 9

www.globalimebank.com), SMS Banking Services and SMS Notification Services among

other such value added proposition to its customers. The bank has also been issuing VISA debit
and VISA credit cards to its customers since 2009. GIBL is the only bank to provide SMS alert
to its customers on credit transactions and credit card transactions besides other transactions.
GIBL has introduced "Global Smart" an advance banking application with customized features
on updated format for financial transaction through SMS and Internet Connectivity.
The bank has been maintaining harmonious correspondent relationships with more than 60
different international banks from various countries to facilitate trade, remittance and other
cross border services. Through these correspondents the bank is able to provide services in any
major currencies in the world. The bank also maintains its extension offices in India and Middle
East to assist in the remittance of funds from overseas Nepalese workers. These services are
soon to be expanded to South Korea.

As part of financial inclusion, Global IME Bank has addressed new strategy of launching
branchless banking service in the remotest parts of the country where presence of financial
institutions are very less in number or not at all. Within the short duration of 3 years bank has
already launched 249 branchless banking services catering more than 22,000 customers on
their daily deposits and withdrawals. Our branchless banking locations also offer micro lending
facility to small farmers and businessmen. The bank is now operating 270 branches, 38
extension and revenue collection counters and 249 Branchless Banking facilities spread
throughout Nepal. All of the bank's branches have been established as full service outlets that
offer a large range of banking services to its customers. The bank also operates 257 ATMs
throughout the country strategically placed for the convenience of customers.
(https://globalimebank.com/global-ime-bank-profile.html)

1.3 Objective of the Study

The general objective of this study is to evaluate and analyse the effectiveness of liquidity
management policies of Global IME Bank Limited. The specific objectives can be mentioned
as below:
 To evaluate various liquidity ratios of GIBL.
 To suggest the optimum liquidity management policies.
 10

1.4 Rationale of the Study

The importance of adequate liquidity in the sense of the ability of a firm to meet current/short-
term obligations when they become due for payment cash is over-stressed. In fact liquidity is
a pre-requisite for the very survival of a firm. The short-term creditors are interested to know
the short-term solvency or liquidity position of a firm. But liquidity implies, from the viewpoint
of utilization of funds of the firm that funds are idle or they earn very little. A proper balance
between the two contemporary requirements i.e. liquidity and profitability is required for
efficient financial management. The liquidity ratio measures the ability of a firm to meet its
short-term obligation and reflects the short-term financial strength/solvency of a firm.

This study emphasizes the welfare of students while preparing fieldwork report; they gain
knowledge through their own experience enabling them to deal with problems relating to their
studies. The study also intends to let students know about required information by them. The
fieldwork report may be useful for the library purpose so that any student who wants to prepare
a report can have some ideas about it. The fieldwork report can be used as guideline while
preparing a small project report. The report may be useful for those who are willing to know
something about liquidity analysis of a commercial bank.

1.5 Literature Review

There is a large body of literature on bank liquidity management. In literature we come across
several concepts and terms in the context of liquidity management of the banking sector. Clarity
of the concepts and terms may contribute to better understanding, interpretation and discussion.
Hence an attempt is made to collect and present the relevant details in this study.

Ensuring that a firm has sufficient liquidity to finance valuable projects that occur in the future
is at the heart of the practice of financial management. However, although discussion of these
issues goes back at least to Keynes (1936), a substantial literature on the ways in which firms
manage liquidity has developed only recently. We argue that many of the key issues in liquidity
management can be understood through the lens of a framework in which firms face financial
constraints and wish to ensure efficient investment in the future. We present such a model and
use it to survey many of the empirical findings on liquidity management.
 11

Theories of Liquidity Management

In 1967, an article written by G. Walter Woodworth appeared in The National banking Review,
a publication of the U.S. Treasury Department. In this paper, Woodworth suggests that there
are four different theories of liquidity management used by commercial bankers. These theories
of liquidity management are based either on the management of assets or liabilities. There are
three theories based on the management of asset viz. Commercial Loan Theory, The
Shiftability Theory and The Anticipated Income Theory and one theory based on the liabilities
is called Liability Management Theory. Some liquidity management theories are presented
below:

i. Commercial Loan Theory

ii. The Shiftability Theory
iii. The Anticipated Income Theory
iv. The Liability Management Theory

i. Commercial Loan Theory:

The Commercial Loan or the Real Bills Doctrine theory states that a commercial bank should
forward only short-term self-liquidating productive loans to business organizations. Loans
meant to finance the production, and evolution of goods through the successive phases of
production, storage, transportation, and distribution are considered as self-liquidating loans.
This theory also states that whenever commercial banks make short term self-liquidating
productive loans, the central bank should lend to the banks on the security of such short-term
loans. This principle assures that the appropriate degree of liquidity for each bank and
appropriate money supply for the whole economy.

Adam Smith (1776) provided the first systematic exposition of this doctrine in his Wealth of
Nations. Basically, it is a theory of asset management that emphasized liquidity, the doctrine
held that banks should restrict their earning assets to “real” bills of exchange and short-term,
self-liquidating advances for commercial purposes. In this way, it was argued, individual
banking institutions could maintain the liquidity necessary to meet the requirements of deposit
withdrawals on demand.

The commercial loan theory of credit became obsolete both because of its conceptual flaws
and its impracticality. A critical underlying assumption of the theory held that short-term
commercial loans were desirable because they would be repaid with income resulting from the
 12

commercial transaction financed by the loan. It was realized that this assumption would
certainly not hold during a general financial crisis even if bank loan portfolios did conform to
theoretical standards, for in most commercial transactions the purchaser of goods sold by the
original borrower had to depend to a significant extent on bank credit. Without continued
general credit availability, therefore, even short-term loans backing transactions involving real
goods would turn illiquid. Rigid adherence to the orthodox doctrine was, furthermore, a
practical impossibility if banks were to play a role in the nation’s economic development.

ii. The Shiftability Theory:

This theory was proposed by H.G. Moulton (1915) who insisted that if the commercial banks
continue a substantial amount of assets that can be moved to other banks for cash without any
loss of material in case of requirement, there is no need to depend on maturities.

This theory states that, for an asset to be perfectly shiftable, it must be directly transferable
without any loss of capital when there is a need for liquidity. This is specifically used for short
term market investments, like treasury bills and bills of exchange which can be directly sold
whenever there is a need to raise funds by banks. But in general circumstances when all banks
require liquidity, the shiftability theory need all banks to acquire such assets which can be
shifted on to the central bank which is the lender of the last resort.

A major defect in the Shiftability theory was discovered similar to the one that led to the
abandonment of the commercial loan theory of credit, namely that in times of general crisis the
effectiveness of secondary reserve assets as a source of liquidity vanishes for lack of a market.
The role of the central bank as lender of last resort gained new prominence, and ultimately
liquidity was perceived to rest outside the banking system. Further- more, the soundness of the
banking system came to be identified more closely with the state of health of the rest of the
economy, since business conditions had a direct influence on the cash flows, and thus the re-
payment capabilities, of bank borrowers. The shiftability theory survived these realizations
under a modified form that included the idea of ultimate liquidity in bank loans resting with
shiftability to the Federal Reserve Banks. Under this institutional scheme, the liquidity
concerns of banks were partially returned to the loan portfolio, where maintenance of quality
assets that could meet the test of intrinsic soundness was paramount. (Botoe, 2012).
 13

iii. The Anticipated Income Theory:

This theory was proposed by H.V. Prochnow (1944) on the basis of the practice of extending
term loans by the US commercial banks. This theory states that irrespective of the nature and
feature of a borrower’s business, the bank plans the liquidation of the term-loan from the
expected income of the borrower. A term-loan is for a period exceeding one year and extending
to a period less than five years. It is admitted against the hypothecation (pledge as security) of
machinery, stock and even immovable property. The bank puts limitations on the financial
activities of the borrower while lending this loan. While lending a loan, the bank considers
security along with the anticipated earnings of the borrower. So a loan by the bank gets repaid
by the future earnings of the borrower in instalments, rather giving a lump sum at the maturity
of the loan.

The Anticipated Income theory holds that liquidity can be ensured if scheduled loan payments
are made on future income of the borrower This theory relates loan repayment to income than
rely on collateral. This theory also holds that a banks liability can be influenced by the maturity
pattern of loans and investment portfolios. The theory recognised that certain types of loans
have more liquidity than others. On the basis of this theory, bank management adopted ladder
effect in the investment portfolio. Banks ensured a certain amount of securities maturing
annually and at times when funds might be demanded for lending or withdrawal. However
there was no clue about the future income of the borrower. (Santha, 2013)

iv. The Liability Management Theory:

During the 1960s, a new theory of commercial bank liquidity emerged which is now known as
the "Liability Management Theory." According to this concept, it is unnecessary for banks to
observe traditional standards in regard to self-liquidating loans or liquid assets since additional
funds can usually be obtained, by either purchasing or borrowing them in the money market,
whenever the bank faces a liquidity need. This theory emphasizes that the banker is not
restricted to the asset side of the balance sheet in the meeting of his liquidity needs; there also
is a certain amount of flexibility available in managing the liability side of the ledger. The new
flexibility derives from the intentional altering of the amount and kind of liabilities which a
bank will hold.

The commercial banker can tap the money market for funds through the assumption of
liabilities—borrowed funds, purchased funds, or new customer deposits. When in need of
 14

funds, the banker can try to attract more deposits to his bank or he can use any of several forms
of funds acquisition in the money market. These sources include the purchase of Federal funds,
sales of securities under repurchase agreements, borrowing from correspondent banks,
borrowing from the Federal Reserve bank (if the commercial bank is a member bank),
borrowing through the issuance of short-term, unsecured promissory notes, raising capital
funds from the sale of debentures and/or capital stock, borrowing in the Eurodollar market, and
obtaining funds through the sale of commercial paper by bank holding companies or nonbank
affiliates. All of these sources may provide the banker with ample amounts of borrowed or
purchased liquid funds. (Fleming, 1974).

Review of Journal and Articles

A research entitled “Macroeconomics and Bank-Specific factors affecting Liquidity: A study
of Nepali Commercial banks” has examined the form and pattern of liquidity, non-performing
loan, return on equity, gross domestic product, inflation and inter-bank rate in Nepalese
commercial banks. The objective is to analyse the relationship between liquidity and bank
specific variables. The findings reveal that there is a significant influence of return on asset,
return on equity, non-performing loan, capital adequacy ratio, gross domestic product on
liquidity of a bank. The major conclusion of the study is return on equity, return on assets, non-
performing loan, interbank rate have negative impact on the liquidity of Nepalese commercial
banks indicating that higher the return on equity, return on assets, nonperforming loan,
interbank rate, lower the liquidity. The study also concludes that Capital Adequacy Ratio,
Gross Domestic Product and inflation have positive impact on liquidity of Nepalese
commercial banks indicating that higher the Capital Adequacy Ratio, Gross Domestic Product
and inflation, higher will be the liquidity. (Ojha, 2018).

A research entitled “Liquidity management and The Islamic Bank financing constraints” aims
to examine the degree of constraint the liquidity management has on the Islamic bank financing
activities. To realise the objectives of the study, this study utilised the dynamic panel data for
the period of 1998 to 2014. The empirical result of this study proves that there is a trade-off
between liquidity holdings and financing operations. The coefficients on financing with liquid
assets and securities are negatively related. Consistent with the theory the negative relationship
proves that an increase in the liquidity holdings of bank reduces the excess fund resources that
can be delivered to the credit market. Eventually, while excessive liquidity holdings do offer
 15

safety to the bank, excessive holding on liquidity reduces excess fund for financing. Hence,
bank portfolio management should consider and develop a strategy and liquidity plan that able
to balance the risks. A banking firm must determine the appropriate level of asset versus
liability management in view of liquidity risk. (Bakar, Nasir, Razak, Kamsi, and Tambi, 2018)

In February 2008 the Basel Committee on Banking Supervision (BCBS) published “Liquidity
Risk Management and Supervisory Challenges”. The difficulties outlined in that paper
highlighted that many banks had failed to take account of a number of basic principles of
liquidity risk management when liquidity was plentiful. Many of the most exposed banks did
not have an adequate framework that satisfactorily accounted for the liquidity risks posed by
individual products and business lines, and therefore incentives at the business level were
misaligned with the overall risk tolerance of the bank. Many banks had not considered the
amount of liquidity they might need to satisfy contingent obligations, either contractual or non-
contractual, as they viewed funding of these obligations to be highly unlikely. Many firms
viewed severe and prolonged liquidity disruptions as implausible and did not conduct stress
tests that factored in the possibility of market wide strain or the severity or duration of the
disruptions. Contingency funding plans (CFPs) were not always appropriately linked to stress
test results and sometimes failed to take account of the potential closure of some funding
sources.

A working paper entitled “Banks, Liquidity Management and Monetary Policy” examines how
different shocks affect the banking system by altering the trade-off between profiting from
lending and incurring greater liquidity risks. This paper presents a tractable quantitative model
of banks' liquidity management and the credit channel of monetary policy. In the model, banks
engage in maturity transformation, which exposes them to liquidity risk. To insure against
unexpected deposit withdrawals, banks hold reserves as a precautionary buffer. Banks that face
large withdrawals deplete their reserves and must resort to costly interbank market and discount
window borrowing. Monetary policy has the power to alter the liquidity premium and, in that
way, to affect real economic activity. (Bianchi and Bigio, 2017).

Commercial banks have assumed the role of intermediation in the financial market. In a post
crisis era, banks should be deeply concerned about the essence of liquidity management. The
primary accountability falls on the bank itself and reliant on government or central bank for
bailout should be avoided as much as possible as we have witnessed in the past that collapse
of one commercial bank creates a havoc in the world economy.
 16

Review of Thesis

Sapkota (1998) in his study on “Short Term Financing of Nepalese manufacturing companies”
examined, the mix financing pattern has been followed by Nepalese manufacturing companies.
These companies have not planned how much funds to be raised from which resources. They
did not care any other things regarding to this sources. The main findings of the study are as
follows:

 Nepalese manufacturing companies’ liquidity position is not good.

 Working capital management of Nepalese manufacturing companies is poor and most of
the companies have negative working capital.
 Cash and the ratio of inventory to short-term financing is widely varied among the
manufacturing companies during the study period.

A thesis entitled “Working Capital and Liquidity Management of Bank of Kathmandu Limited”
has evaluated the practices and policies followed by Bank of Kathmandu with respect to the
management of working capital and liquidity. The study concluded that the current ratio of the
bank is more than one. It means the bank has sufficient liquidity to remain solvent. It is true
that such higher ratios indicates greater ability of bank to pay its bills. However, a higher
current ratio is undesired. Thus higher idle funds are lying in the bank vault which may seem
unproductive for bank. Thus, the bank should try to reduce its current assets to increase its
profitability. (Shrestha, 2010).

Gadtaula (2009) has carried out his research on "Liquidity Management of Nepal Development
Bank Limited and Development Credit Bank Limited”. The main objective of this study is to
examine and analyze liquidity position of Nepal Development Bank and Development Credit
Bank Limited. To fulfill the objectives, an appropriate research methodology was used. In the
ratio analysis, four different categories were tested with their sub-division. The ratios tested
were liquidity ratio, profitability ratio, and leverage ratio, utilization ratio. These ratios focus
on current assets and current liabilities and are used to ascertain the short term solvency
position of a firm. The apparent data conclude that both banks have very low liquidity position
because the both current and quick ratios are below the standard. Both banks will not be able
to pay short-term liability when their creditors demand. It may create difficult situation in
future. So, both banks should keep sufficient level of Current and Quick assets to maintain its
liquidity position.
 17

1.6 Methods of Study

Research Design
The research design refers to the overall strategy that we choose to integrate the different
components of the study in a coherent and logical way, thereby, ensuring we will effectively
address the research problem; it constitutes the blueprint for the collection, measurement, and
analysis of data. Research design is a set of methods used to analyse the variable to solve a
specific problem. Research design is the plan, structure and strategy of investigations
conceived so as to obtain an answer of research questions to control variation. (Kerlinger 1978).

Population and Sample

A list of licensed commercial banks was obtained from official website of NRB. There are
altogether 27 commercial banks in Nepal. Commercial banks can be categorized into two types
on the basis of ownership viz. Public Sector and Private Sector. Nepal Bank Ltd., Rastriya
Banijya Bank and Agricultural Development Bank Ltd. are public sector banks while the
remaining 24 are Public sector banks. Out of the total population, one commercial bank i.e.
Global IME Bank Ltd. has been selected as sample for this study by using purposive sampling
method.
Global IME Bank Ltd. being a private sector bank was selected so that the study could represent
true picture of commercial banks. Both primary and secondary data has been used in this study.
Bank employees are the primary sources of data and following are secondary sources of data
used in this study:
 Annual Reports, Newsletters, Brochures etc. of the subject bank.
 Laws, guidelines and directives regarding the subject matter.
 Text books.
 Articles published in Newspapers, Journals, Magazines, Library of Gyankunj College.
 Various related internet forums.

Data Collection Procedure

Mainly, the study is based on secondary data. The annual reports of GIBL were collected from
the official website of the bank. Several publications, directives and guidelines of NRB were
also referred to from the website of NRB. Various reports, journals, textbooks and unpublished
dissertation were also obtained by visiting TU Central Library.
 18

Data Processing and Presentation

Date collected for the study can be presented in various forms. Such data has been presented
in tabular forms as well as graphical forms. As far as the different computation is concerned it
has been done with the help of computer software.

Tools for Data Analysis

The data collected from different sources are recorded systematically and identified.
Appropriate financial and statistical tools has been used according to the nature and type of
data as well as subject matter.

i) Ratio Analysis:
Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational
efficiency, and profitability by comparing information contained in its financial statements.
Outside analysts use several types of ratios to assess companies, while corporate insiders rely
on them less because of their access to more detailed operational data about a company.
When investors and analysts talk about fundamental or quantitative analysis, they are usually
referring to ratio analysis. The data retrieved from the statements is used to compare a
company's performance over time to assess whether the company is improving or deteriorating,
to compare a company's financial standing with the industry average, or to compare a company
to one or more other companies operating in its sector to see how the company stacks up.
Liquidity ratio measures the liquidity position and short term solvency of the firm indicating
the company’s ability to meet short term obligations. Liquidity ratio measures the firm’s ability
to meet current obligations. In fact analysis of liquidity needs for the preparation of cash
budgets and cash and funds flow statement but liquidity ratios, by establishing a relationship
between cash and other current assets to current obligations, provides quick measure of
liquidity. Following ratios have been computed and analysed in this study:

a. Current Ratio: The current ratio is a liquidity ratio that measures a company's ability to pay
short-term obligations or those due within one year. It tells investors and analysts how a
company can maximize the current assets on its balance sheet to satisfy its current debt and
other payables. It can be calculated using following formula:
Current Assets
Current Ratio = * 100
Current Liabilities
 19

b. Cash Ratio: The Cash ratio is a conservative liquidity ratio that measures a company's
ability to pay short-term obligations with the most liquid assets i.e. its cash and its near cash
resources. This information is useful to creditors when they decide how much money, if any,
they would be willing to loan a company. The cash ratio is almost like an indicator of a firm’s
value under the worst-case scenario, say, where the company is about to go out of business. It
can be calculated using following formula:
Cash and Cash Equivalents
Cash Ratio = * 100
Current Liabilities

c. Loan to Deposit Ratio: Loan-deposit ratio (LTD or LDR) is a ratio between the banks
loans and deposits. If the ratio is lower than one, the bank relied on its own deposits to make
loans to its customers, without any outside borrowing. If on the other hand the ratio is greater
than one, the bank borrowed money which it re-loaned at higher rates, rather than relying
entirely on its own deposits. Banks may not be earning an optimal return if the ratio is too low.
If the ratio is too high, the banks might not have enough liquidity to cover any unforeseen
funding requirements. It can be calculated using following formula:
Total Loan
Loan to Deposit Ratio = * 100
Total Deposit

d. Cash and Bank balance to Deposit Ratio (excluding fixed deposit): This ratio is
employed to measure whether cash and bank balance is sufficient to cover its current calls
margin including deposits. It is calculated by dividing cash and bank balance by saving margin
and current deposits (excluding fixed deposit). It can be calculated using following formula:
Cash and Bank Balance
Cash and bank to Deposit Ratio = * 100
Total Deposit (excluding Fixed Deposit)

e. Fixed Deposit to Total Deposit Ratio: Fixed deposits are long term investment and high
interest charge bearing deposit. Sufficient fixed deposits enable banks to grant loan to their
clients at higher interest rate and for a longer period of time. Fixed Deposit usually have longer
maturity period. This ratio is calculated in order to find out the proportion of total deposit whose
obligation is usually beyond the normal operating cycle. The higher the ratio, better the
liquidity and lower proportion of current or short term deposits. It can be calculated using
following formula:
Fixed Deposit
Fixed Deposit to Total Deposit Ratio = * 100
Total Deposit
 20

ii) Statistical Analysis:

Statistical analysis is a component of data analytics. Statistical analysis involves collecting and
scrutinizing every data sample in a set of items from which samples can be drawn. A sample,
in statistics, is a representative selection drawn from a total population. The goal of statistical
analysis is to identify trends. A retail business might use statistical analysis to find patterns in
unstructured and semi-structured customer data that can be used to create a more positive
customer experience and increase sales. Various financial tools mentioned above were used to
analyse the liquidity management of GIBL. Likewise, the relationship between different
variables related to the study topics were also drawn out using statistical tools.

Trend Analysis
Trend analysis is a technique used in technical analysis that attempts to predict the future trend
based on recently observed trend data. Trend analysis is based on the idea that what has
happened in the past gives an idea of what will happen in the future. Trend analysis tries to
predict a trend. Trend analysis is helpful because moving with trends, and not against them,
will lead to profit for an investor.

Trend analysis is the process of trying to look at current trends in order to predict future ones
and is considered a form of comparative analysis. A trend is the general direction the market is
taking during a specified period of time. Trends can be both upward and downward. While
there is no specified minimum amount of time required for a direction to be considered a trend,
the longer the direction is maintained, the more notable the trend is. Trend Analysis has been
a very useful and commonly applied statistical tool for forecast the future events in quantitative
terms. On the basis of tendencies in the dependent variables of the past periods, the future trend
is predicted. This analysis takes the historical data as the basis of forecasting. This method of
forecasting the future trend is based on the assumption that the past tendencies of the variable
are repeated in the future or the past events affect the future events significantly. Line chart is
used to visualize the trend in respective ratios. The trend line can be represented by using the
following formula:
Yc = a + bx ;
where,
Yc = the estimated value of Y for given value of X in coordinate axes
a = Y intercept of mean of Y value
 21

b = the slope coefficient i.e. rate of change

X = the independent variable in time axis

To find the values of a & b, we have to solve the following equations:

∑ Y = N a + b ∑ X ……………………… (i)
∑ XY = a ∑X + b∑X2 ……………….…. (ii)

Where, N = Number of years

To make calculation easier, the deviation of the independent variable (i.e. time) are taken from
the middle of the time period so that ∑ X = 0, then the above two equation changes to simple
fraction where we can determine the value of a and b.

1.7 Limitation of the Study

The limitations of the study are those characteristics of design or methodology that impacted
or influenced the interpretation of the findings from the research. They are the constraints on
generalizability, applications to practice, and/or utility of findings that are the result of the ways
in which we initially chose to design the study or the method used to establish internal and
external validity or the result of unanticipated challenges that emerged during the study.

This study is only for the purpose to fulfil the partial requirement of Bachelors of Business
Studies Programme. This is not far from several limitations, which weaken the hearth of the
study. The present study suffers from following limitations.

 There are 27 commercial banks in Nepal but this study covers only one bank. So, entire
banking industry cannot be represented by the data of one bank.
 The whole study is based on the financial data of 5 years period only.
 This study only focuses only on liquidity management aspect of the bank.
 The basis of this study is secondary data.
 The research is limited only for the purpose of fulfilling the partial requirement of
Bachelor of Business Studies Programme.
 22

CHAPTER II: RESULTS AND ANALYSIS

2.1 Data Presentation and Analysis

Data presentation and analysis forms an integral part of all academic studies, commercial,
industrial and marketing activities as well as professional practices. Presentation of data
requires skills and understanding of data. It is necessary to make use of collected data which is
considered to be raw data. This raw data must be processed to put for any use or application.
Data analysis helps in the interpretation of data and take a decision or answer the research
question. This can be done by using various data processing tools and software. Data analysis
starts with the collection of data, followed by data processing. This processing of data can be
done by various data processing methods and sorting it. Processed data helps in obtaining
information from it as the raw data is non-comprehensive in nature. Presenting the data includes
the pictorial representation of the data by using graphs, charts, maps and other methods. These
methods help in adding the visual aspect to data which makes it much more comfortable and
easy to understand. Various methods of data presentation can be used to present data and facts.

Data presentation and analysis plays an essential role in every field. An excellent presentation
can be a deal maker or deal breaker. Some people make an incredibly useful presentation with
the same set of facts and figures which are available with others. At times people who did all
the hard work, but failed to present it present it properly have lost essential deals, the work
which they did is unable to impress the decision makers. So to get the job done, especially
while dealing with clients or higher authorities, presentation matters! No one is willing to spend
hours in understanding what you have to show and this is precisely why presentation matters!
It is thus essential to have clarity on what is data presentation.

The basic objective of this study is to analyse the liquidity management of GIBL and this
chapter acts as a mechanism to fulfil this very objective. Presentation and analysis of data is a
must to come to a conclusion and make a decision. The analysis of data in this study has been
done with the help of financial statement of GIBL from 2014/15 to 2018/19. Ratio analysis and
Trend analysis have been used for presentation and analysis. Several ratios such as current
ratio, loan to deposit ratio, deposit ratios are calculated and presented in tabular format.
 23

a. Current Ratio: This ratio shows the relationship between current assets and current
liabilities. The current ratio is a liquidity ratio that measures the ability of a firm to pay off its
short term debts and obligations. It compares a firm's current assets to its current liabilities.
The current ratio is an indication of a firm's liquidity. Acceptable current ratios vary from
industry to industry. The ratio of GIBL is presented in following table.

Table 1.1: Current Ratio

(Rs. In millions)
Year Current Assets Current Liabilities Ratio
2014/15 66,664 50,506 1.32
2015/16 77,891 67,539 1.15
2016/17 97,397 92,589 1.05
2017/18 102,884 102,397 1.00
2018/19 124,847 121,044 1.03
(Source: Annual Report of GIBL 2014/15 – 2018/19)

The table shows the current ratio of GIBL for the last five years. For the period under study
ratio ranges from 1 to 1.32. Higher current ratio indicates better liquidity position. Higher
current ratio means there are more current assets for current liabilities. A good current ratio lies
between 1.2 and 2. During 2014/15, the current ratio of GIBL is 1.32 and then it has decreased
after since with lowest being 1 during 2017/18. Current ratios acts as a margin of cushion for
payment of current liabilities.

Fig. 1.1: Current Ratio

1.40
1.20
1.00
0.80
0.60
0.40
0.20
-
2014/15 2015/16 2016/17 2017/18 2018/19

The trend line shows the current ratio over the period of five years. The line chart shows a
decreasing trend till 2017/18 while it has slightly started to rise after this period. GIBL’s current
ratio at the end of 2018/19 is 1.03. Conventionally, 2:1 was considered a good current ratio.
However, contemporary study proves that lower current ratio always does not mean that the
firm is not operating properly.
 24

b. Cash Ratio: The cash ratio is a liquidity measure that shows a company's ability to cover
its short-term obligations using only cash and cash equivalents. Compared to other liquidity
ratios, the cash ratio is generally a more conservative look at a company's ability to cover its
debts and obligations, because it sticks strictly to cash or cash-equivalent holdings, leaving
other assets, including accounts receivable, out of the equation. The ratio of GIBL is presented
in following table.

Table 1.2: Cash Ratio

(Rs. In millions)
Year Cash & Cash Equivalent Current Liabilities Ratio
2014/15 7,657 50,506 0.15
2015/16 8,643 67,539 0.13
2016/17 18,936 92,589 0.20
2017/18 12,796 102,397 0.12
2018/19 16,749 121,044 0.14
(Source: Annual Report of GIBL 2014/15 – 2018/19)

The table shows the cash ratio of GIBL for the last five years. For the period under study ratio
ranges from 0.12 to 0.20. Higher cash ratio indicates better liquidity position. Higher cash ratio
means more current liabilities are covered by existing cash and cash equivalents. There is no
ideal figure but generally 0.5 to 1 is preferred. During 2014/15, the cash ratio of GIBL is 0.20
and then it has decreased after since with lowest being 0.12 during 2017/18.

Fig. 1.2: Cash Ratio

0.25
0.20
0.15
0.10
0.05
0.00
2014/15 2015/16 2016/17 2017/18 2018/19

The trend line shows the cash ratio over the period of five years. GIBL’s cash ratio at the end
of 2018/19 is 0.14. Even though there is not a specific pattern of trend line over the last five
years, it has increased slightly since the previous year.The highest point during 2016/17
indicates that in comparision to other years, more cash and cash equivalents were available
against current liabilty during the year 2016/17.
 25

c. Loan to Deposit Ratio: The loan-to-deposit ratio (LDR) is used to assess a

bank's liquidity by comparing a bank's total loans to its total deposits for the same period. The
LDR is expressed as a percentage. If the ratio is too high, it means that the bank may not have
enough liquidity to cover any unforeseen fund requirements. Conversely, if the ratio is too low,
the bank may not be earning as much as it could be. The ratio is presented in following table.

Table 1.3: Loan to Deposit Ratio

(Rs. In millions)
Year Total Loan Total Deposit Ratio
2014/15 50,227 60,176 83%
2015/16 60,841 74,683 81%
2016/17 80,820 101,910 79%
2017/18 93,373 106,510 88%
2018/19 114,060 124,499 92%
(Source: Annual Report of GIBL 2014/15 – 2018/19)

The table shows the ratio of loan and deposit of GIBL for the last five years. For the period
under study ratio is below one, which means that bank entirely relied on its deposits to grant
loan. High ratio indicates that bank do not have sufficient liquidity while Low ratio indicates
that bank might not be earning optimal return. Trade off should be maintained between the
return and liquidity. The loan to deposit ratio can also be analysed using the line chart.

Fig. 1.3: Loan to Deposit Ratio

95%

90%

85%

80%

75%

70%
2014/15 2015/16 2016/17 2017/18 2018/19

Loan to Deposit ratio tells us exactly the sources from where we are providing the loan to the
customers. It might be from customer’s deposit or from our additionally raised funds. The ratio
during 2018/19 is 0.92. During the period under study there is no specific trend but for last
three years, this ratio has shown an increasing trend. Increase of loan to deposit ratio beyond 1
can be sign of worry for the banking business since it means that bank is raising extra capital
and refinancing it to their customer at a high interest rate.
 26

d. Cash and Bank Balance to Deposit (excluding Fixed Deposit) Ratio: Higher the ratio,
better for bank liquidity because it indicates that readily cash is available in case the non-fixed
deposits are to be settled immediately. The ratio is presented in following table.

Table 1.4: Cash and Bank balance to Deposit Ratio

(Rs. In millions)
Year Cash and Bank Total Deposit (except FD) Ratio
2014/15 7,657 40,760 19%
2015/16 8,643 54,842 16%
2016/17 18,936 50,363 38%
2017/18 12,796 53,152 24%
2018/19 16,749 64,078 26%
(Source: Annual Report of GIBL 2014/15 – 2018/19)

The table shows the ratio of cash and bank balance to total deposit (excluding fixed deposit)
for the last five years. The ratios are fluctuating over the study period. This relationship shows
what amount of current call margins including deposits can be covered by existing cash and
bank balance. The highest coverage is 38% during 2016/17 while the lowest coverage is 16%
during 2015/16. This implies that 38% of current call margins are covered by the cash and bank
balance during 2016/17 compared to only 16% in the previous year.

Fig. 1.4: Cash and Bank Balance to Deposit Ratio

40%

30%

20%

10%

0%
2014/15 2015/16 2016/17 2017/18 2018/19

The chart shows the trend of cash and bank balance to deposit ratio of GIBL during the period
under study. There is no specific pattern regarding the maintenance of cash and bank balance
with respect to total deposits. The ratio is fluctuating during the period under study. During the
period under study the ratio rises to 38% during the year 2016/17. Bank must maintain a
reasonable amount of liquidity for proper operations as well as to service the cash withdrawals
from customers. However, the amount of cash held in vault or with the central bank should not
be excessive because such excess holding will increase opportunity loss for the bank.
 27

e. Fixed Deposit to Total Deposit Ratio: Fixed deposits have a longer maturity period than
other deposits like savings or current. This ratio helps us to determine the liquidity by
comparing the long term liability to total liability. This ratio should be considered during policy
formulation because deposits having longer tenure can reduce the stress on liquid assets. This
ratio is calculated in the following table.

Table 1.5: Fixed Deposit to Total Deposit Ratio

(Rs. In millions)
Year Fixed Deposit Total Deposit Ratio
2014/15 19,416 60,176 32%
2015/16 19,841 74,683 27%
2016/17 51,547 101,910 51%
2017/18 53,358 106,510 50%
2018/19 60,421 124,499 49%
(Source: Annual Report of GIBL 2014/15 – 2018/19)

The table shows the ratio of fixed deposits to total deposit for the last five years. The ratios are
fluctuating over the study period. This relationship shows what amount of deposits should not
be worried about in the recent future. During 2015-16, out of total deposits of Rs. 74,683/-,
only Rs. 19,841/- were fixed deposit. While during 2016-17 out of Rs. 101,910/-, Rs. 51,547/-
were accepted as fixed deposits.

Fig. 1.5: Fixed Deposit to Total Deposit Ratio

60%
50%
40%
30%
20%
10%
0%
2014/15 2015/16 2016/17 2017/18 2018/19

The chart shows the proportion of fixed deposit to total deposit of GIBL during the period
under study. A slight decrease in the ratio can be observed after 2016-17. This indicates that
bank is accepting current and savings deposits more than fixed deposits. Higher ratio indicates
that a firm has higher liquidity compared to the firm which has a lower ratio. Fixed deposits
are however a high liability for banks. Interest expenses on fixed deposits are comparatively
higher than other current deposits.
 28

2.2 Major Findings of the Study

The secondary data available from various sources has been analysed with the help of above
mentioned financial and statistical tools. This topic is focused on the major findings from the
secondary data analysis of liquidity management of a commercial bank, GIBL. The period
covered under the study is for F.Y. 2014/15 to 2018/19. The major findings drawn from the
analysis of liquidity policies of bank can be summarized as below:
 During the period under study, current ratio of GIBL remained above 1. During 2014/15, it
was 1.32 while during 2017/18 it decreased to 1. When current ratio of any firm becomes 1, it
indicates that the firm will be left with no current asset after current liabilities are settled in
case the firm is going for liquidation. The bank has well maintained its ratio above 1. There is
no apparent risk for short term creditors as regards to current ratio.
 Cash ratio is a refined and conservative benchmark than current ratio. During the period under
study, cash ratio ranges from 0.12 to 0.20. This means that the cash and cash equivalents cover
only for 12% to 20% of current liabilities over the period of study. In case any event leads to
closure of business, the most liquid asset cannot even cover 12 months debts and obligations.
This can be a concern for creditors. Cash Position of GIBL is not satisfactorily maintained.
 From 2016/17 to 2017/18, there has been an increase in operations but the cash and cash
equivalents have decreased by around Rs. 6,000 millions.
 Loans and Deposits both have doubled during the period of study. This shows that the
banking operations are expanding to previously unreached areas.
 We can observe the increasing trend in loan to deposit ratio. The ratio during the year 2018/19
is 0.92. This means that out of Re. 1 accepted as deposit, the bank is lending Rs. 0.92 as a loan.
As this ratio rises closer to 1, the liquidity of the bank shrinks.
 Cash and Bank balance to deposit (excluding fixed deposit ratio) shows how much percentage
of savings, demands and call deposits can be covered by the available cash and cash
equivalents. During last five years, the coverage fluctuated from 16% to 38%. This indicates
that not even 40% of non-fixed deposits are covered by available cash and cash equivalent.
 Fixed deposit to Total Deposit ratio did not show a specific pattern during the period. After
2016/17, this ratio has decreased slightly. The proportion of fixed deposit in total deposit was
49% during 2018/19. Bank is accepting around half of its deposits as time bound deposit.
Increasing fixed deposits enhances liquidity because interest earned on refinanced amount is
always greater than the interest expended on fixed deposit amount.
 29

CHAPTER III: SUMMARY AND

CONCLUSIONS

3.1 Summary
This study has been prepared to analyse the liquidity management policies and practices of
Global IME Bank Ltd. In order to systematically present and analyse the secondary data,
several financial as well as statistical tools such as Ratio analysis, Trend analysis, Line Chart,
Tables have been used. The data under this study pertains from 2014/15 to 2018/19. Chapter
wise analysis has been presented.

First Chapter deals with background and subject matter of the study. Relevant review of
literature dealing with theoretical background has been dealt here. Objective of the study,
rationale behind the study and methodology used has also been discussed in this chapter.
Second chapter deals with presentation, analysis and interpretation of data using various
financial and statistical tools. Findings have also been incorporated in this chapter. Finally, in
the Third Chapter Summary and Conclusion regarding the entire study has been made.

3.2 Conclusion
Banking business has a major role in advancing human society. The importance of banking
industry in economic development of any country is undisputed. Handling any banking
operations requires proficiency and competency to foresee potential threats. The primary
objective of any bank is to take deposits and grant loans. These jobs require management of
funds, thus liquidity management is lifeblood of any banking enterprise. Nepalese banking
industry is a very competitive market. Various innovative banking solutions are emerging to
provide nepalese people the benefit of technology. Banking products and services are
expanding day by day. This leads to several issues. Liquidity risk is one of them. Commercial
banks are thriving to curb the liquidity risk to the level acceptable for the business. The analysis
of GIBLs’ financial data for the past 5 year reflects its several policies to prevent any future
unfortunate incident.

Liquidity means ability of an organization to settle and pay its short term obligations by using
available current assets without incurring unacceptable losses. There are several indicators that
 30

tell us how the liquidity management policies of a firm are; Out of them, five indicators of one
commercial bank has been analysed in this study viz. current ratio, cash ratio, loan to deposit
ratio, cash and bank to deposit ratio, fixed deposit to total deposit ratio. The bank has been
maintaining sufficient cash and bank balance required for operations of its business as well as
to use them as a safety cushion in case any unfortunate event occurs. The determination of
optimum cash and bank balance to be kept with bank is a very crucial decision. The trade-off
between opportunity cost of idle funds and loss on account of non-maintenance of enough
funds should be considered.

Banks accept deposit at a lower rate and refinance the amount by granting loans at a higher
rate. There also occurs cases when bank have to raise further funds through issue of financial
instruments in order to refinance them at higher rate. Banks' liquidity contracts when monies
are raised to refinance them. Banks should also ensure that enough funds is available with it
for smoothing functioning of its operations. Several stakeholders such as deposit holders,
creditors, employees, government, shareholders are concerned about how bank manages its
funds. Liquidity management policies should be weighted in par with capital structuring
policies considering the havoc it can create in case of any crisis. The going concern of a
business is affected when a long term asset is utilized to settle short term obligation. Liquidity
crisis has the power to completely overturn a smoothly running business as what we saw in the
latest financial crisis.

Thus the overall analysis of relevant data shape the formulation and execution of a particular
liquidity management policy of a bank. Generally, benchmark for banks liquidity position is
almost same around the globe. Liquidity mismanagement is a lot expensive than liquidity
management. The goal towards any optimum policy is achieved coherently with stakeholders’
satisfaction. Therefore a proper trade off should be maintained between opportunity cost and
losses while formulating liquidity management policies in any bank.
 31

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