A COMPARATIVE STUDY ON WORKING CAPITAL

MANAGEMENT OF NEPALESE COMMERCIAL BANKS

(With Reference to SCBNL & HBL)

A THESIS

Submitted By:
Amrit S.J.B. Rana
United College
T.U. Regd. No.: 7-2-421-1-2007
Symbol No. : 4210001

A Thesis Submitted To:

Office of the Dean
Faculty of Management
Tribhuvan University

In partial fulfilment of the requirement for the degree of

Master of Business Studies (M.B.S.)

Kumaripati, Lalitpur
September 2015
 RECOMMENDATION

This is to certify that the Thesis

Entitled:

A COMPARATIVE STUDY ON WORKING CAPITAL MANAGEMENT OF

NEPALESE COMMERCIAL BANKS
(With Reference to SCBNL & HBL)

Submitted by:

AMRIT S.J.B. RANA

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

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

……..……..…….………………… ………………………….
Prof. Dr. Bal Krishna Shrestha Principal
Thesis Supervisor United College
 VIVA-VOCE SHEET

We have conducted the viva–voce of the thesis presented by

AMRIT S.J.B. RANA

Entitled:

A COMPARATIVE STUDY ON WORKING CAPITAL MANAGEMENT OF

NEPALESE COMMERCIAL BANKS
(With Reference to SCBNL & HBL)

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
Master Degree of Business Studies (M.B.S.)

Viva-Voce Committee

Head, Research Department …………………….………

Member (Thesis Supervisor) ..…..………………………..

Member (External Expert) ..…..………………………..

Date ……………………………
 DECLARATION

I hereby declare that this thesis entitled “A COMPARATIVE STUDY ON

WORKING CAPITAL MANAGEMENT OF NEPALESE COMMERCIAL
BANKS (With Reference to SCBNL & HBL)” submitted to the office of Dean,
Faculty of Management, Tribhuvan University is my original work. The work has
been carried out in the form of partial fulfillment of the research for the Master’s
Degree in Business Studies (M.B.S.) under the supervision of Mr. Bal Krishna
Shrestha of United College.

……………………………………
….
Amrit S.J.B. Rana
United College
T.U. Regd. No: 7-2-421-1-2007
Symbol Number: 421001
 ACKNOWLEDGEMENT

This thesis is prepared to submit as a partial fulfillment for the Master’s of Business
Studies set by T.U. on the topic “A COMPARATIVE STUDY ON WORKING
CAPITAL MANAGEMENT OF NEPALESE COMMERCIAL BANKS (With
Reference to SCBNL AND HBL)”. The main aim of my study and presentation of
this thesis is to give knowledge on Working Capital Management based on two
banks Standard Chartered Bank Nepal Limited and Himalayan Bank Limited
referring to the five fiscal years data.

I would like to extend my deep and sincere gratitude towards experienced

supervisor Mr. Bal Krishna Shrestha. I am able to complete my thesis under his
kind guidance and encouragement towards this research thesis.

I would like to express my sincere gratitude to all my respected and honourable

teachers from United College who gave this opportunity and took their valuable
suggestion regarding this thesis work.

I would also like to thank all my friends and family members who support me
giving me some suggestion and information regarding this Thesis Writing Report.

Finally, I have used my best effort in the preparation of this thesis report to avoid
any type of error and mistake throughout the work and hope it will be useful for
those who are interested in studying the working capital management.

Amrit S.J.B. Rana

 TABLE OF CONTENTS

TITLE Page No.

Recommendation
Viva Voce Sheet
Declaration
Acknowledgement
Table of Content
List of Table
List of Figure
Abbreviations Used

CHAPTER 1: INTRODUCTION 1-8

1.1 Background of the Study 1
1.1.1 Meanings of Banks 2
1.2.1 Introduction of Selected Banks 3
1.2 Focus of the Study 4
1.3 Statement of the Study 5
1.4 Objectives of the Study 6
1.5 Significance of the Study 7
1.6 Limitations of the Study 7
1.7 Organization of the Study 8

CHAPTER 2: REVIEW OF LITERATURE 9-45

2.1 Introduction 9
2.2 Concept of Working Capital 9
2.3 Classification of Working Capital Management 12
2.4 Sources of Working Capital Management 14
2.5 Objectives of Working Capital Management in Bank 18
2.6 Importance of Working Capital Management 19
2.7 Factors Affecting Working Capital Management 20
2.8 Management of Working Capital 24
2.9 Cash Conversion Cycle 26
2.10 Working Capital Policies 27
2.11 Motives of Holding Cash in Working Capital 30
2.12 Review of Books 31
2.13 Review of Related Articles/Journals 33
2.14 Review of Previous Thesis Works 35
2.15 Research Gap 45

CHAPTER 3: RESEARCH METHODOLOGY 46-55

3.1 Introduction 46
3.2 Research Design 46
3.3 Population and Sample 47
3.4 Nature and Sources of Data 47
3.5 Data Processing Procedure and Analysis 47
3.6 Tools and Techniques 47

CHAPTER 4: PRESENTATION AND ANALYSIS OF DATA 56-78

4.1 Introduction 56
4.1.1 Working Capital to Total Assets 56
4.1.2 Current Ratio 58
4.1.3 Quick Ratio 60
4.1.4 Cash Ratio 62
4.1.5 Debt Ratio 64
4.1.6 Debt Equity Ratio 65
4.1.7 Equity Ratio 67
4.1.8 Return on Assets (ROA) 69
4.1.9 Return on Equity (ROE) 71
4.1.10 Correlation Coefficient between Net Profit & Working Capital
73
4.1.11 Correlation Coefficient between Loan & Advance & Total Deposits
73
4.1.12 Correlation Coefficient between Net Profit & Investment
74
4.1.13 Trend Analysis on Loans & Advances
75
4.1.14 Trend Analysis on Total Deposits
76
4.2 Major Findings of the Analysis 78

CHAPTER 5: SUMMARY, CONCLUSION & RECOMMENDATION 79-84

5.1 Summary 79
5.2 Conclusion 80
5.3 Recommendation 82

BIBLIOGRAPHY
APPENDICES
 LIST OF TABLE

4.1 Working Capital to Total Assets

56
4.2 Current Ratio 58
4.3 Quick Ratio
60
4.4 Cash Ratio
62
4.5 Debt Ratio
64
4.6 Debt Equity Ratio
66
4.7 Equity Ratio 68
4.8 Return on Assets (ROA)
70
4.9 Return on Equity (ROE)
71
4.10 Correlation Coefficient between Net Profit & Working Capital 73
4.11 Correlation Coefficient between Loan & Advance & Total Deposits 73
4.12 Correlation Coefficient between Net Profit & Investment 74
4.13 Trend Analysis on Loans & Advances 75
4.14 Trend Analysis on Total Deposits 76
 LIST OF FIGURE

4.1 Working Capital to Total Assets 57

4.2 Current Ratio 59
4.3 Quick Ratio 61
4.4 Cash Ratio
63
4.5 Debt Ratio
64
4.6 Debt Equity Ratio 66
4.7 Equity Ratio 68
4.8 Return on Assets (ROA) 70
4.9 Return on Equity (ROE)
72
4.10 Trend Analysis on Loans & Advances 75
4.11 Trend Analysis on Total Deposits 77
 ABBREVIATION USED

% : Percentage
& : and
A.D. : Anno Domini
ATM : Automated Teller Machine or Automatic Teller Machine
B.S. : Bikram Sambat
CA : Current Assets
CBB : Cash & Bank Balance
CL : Current Liabilities
CR : Current Ratio
CV : Coefficient of Variation
DDC : Dairy Development Cooperation
EBL : Everest Bank Limited
F/Y : Fiscal Year
HBL : Himalayan Bank Limited
IBM : International Business Machine
INGO : International Non-Governmental Organization
IT : Information Technology
KYC : Know Your Customer
LA : Loans & Advances
Ltd. : Limited
m : Millions
NABIL : Nabil Bank Limited
NBBL : Nepal Bangladesh Bank Limited
NEPSE : Nepal Stock Exchange
NGO : Non-Governmental Organization
NIBL : Nepal Investment Bank Limited
NIC : NIC Bank Limited
NPAT : Net Profit after Tax
NRB : Nepal Rastra Bank
NTC : Nepal Telecommunication Cooperation
P.E. : Probable Error
QA : Quick Assets
QR : Quick Ratio
r : Coefficient of Correlation
r² : Coefficient of Determination
ROA : Return on Assets
ROE : Return on Equity
S.D. : Standard Deviation
SCBNL : Standard Chartered Bank Nepal Limited
S.M.S. : Short Message Service
TA : Total Assets
TD : Total Debt
TDP : Total Deposits
TE : Total Equity
WC : Working Capital
 CHAPTER 1
INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Finance is a business term that deals with the study of funds management. If it is accepted as a
weapon, it enables an organization to pay its bill promptly as it is necessarily linked with the flow
of fund. The management may accept or reject a business provision on the basic of financial
viabilities. A key point in finance is time value of money that states that the purchasing power of
one unit of currency can vary in different period.

Banks play an important role in the economic development of the country & functioning of an
economy. They make the flow of investment easier by taking the deposits & lending to once that
need in the form of loans & advances. Therefore, the role of bank in developing of an economy is
vital for a country. Commercial banks are one of the vital aspects of this sector that deals in the
process of channelizing the available resources in the needed sectors. All the economic activities
are directly or indirectly channeled through banks. Thus, the main objective is collecting the idle
or unused funds, mobilizing them into productive sector in overall economic development.

The main aim of the firm is to maximize the wealth of the shareholder. In its effort to maximize
shareholder’s wealth the firm has to earn sufficient return from day- to-day operation. Earning
sufficient amount of profit requires a successful business. For a success of any business activities,
the firm has to invest enough amounts of funds in assets. There are two type of assets fixed assets
& current assets. Fixed assets are such type of assets, which can’t be converted into cash within a
year. These types of assets take time to convert into cash such as Land & Building, Plant &
Machinery, Vehicles, etc. Current assets are such type of assets which can be converted into cash
within a year such as Cash Balance (Cash in Hand & Cash at Bank), Accounts Receivables,
Inventories (Stock), etc.

Investment in current assets should be neither sufficient neither more nor less as per the required
of the business activities. It should be realized that the working capital needs of the firm might be
fluctuate with the changing in the business activities. This may cause excess or shortage of
working capital frequently. Thus, the firm should have the knowledge of the sources of working
capital funds as well as investment opportunities where the idle funds may be temporarily
invested.

Working capital focuses on the current assets of the firm. Without cash, bills cannot be paid;
without accounts receivables the firm cannot allow the time between delivering goods & services
& collecting the money for the payment to the creditors. Without inventories, the firm cannot hold
in the production process nor can it store the goods to provide immediate deliver. As a result of
critical nature of current assets the management of working capital is one of the most essential in
determine whether a firm will be successful or not in the future.

1.1.1 MEANING OF BANKS

Banks are very important financial intermediaries in financial market. Financial intermediaries not
only savers but also they create new financial products. They gain economics of scale in analysis
of credit worthiness of potential borrowers in processing and collecting lone, minimize cost of
information, and make easy flow of transactions. Banks are the principal source of credit to
household, individuals, and family business all forms and local units of government Furth more,
they are the source of financial information, planning and controlling.

Banking institution is inevitable for resource mobilization and all-round development of the
country. It is resource for economic development; it maintains economic confidence of various
segments and extends credit to people. Bank deal with money by accepting various type of
deposits disbursing loans and investing in productive sectors and rendering other financial
services as the primary function. Banks are channels between saving surplus and saving deficit
people and thus they are the bridge of utilize scatter fund to productive sectors. Hence, they
represent a vital role in the transmission of government economic policies to the economy. When
bank credit is expensive, the investment slows down and unemployment rises. Bank deposit
represents the most significant component of the money supply used by the public, commercial
banks play an important role for economic development of the country as they provide capital for
the development of industry trade and business by investing the saving collected as deposits from
public. They render various services to their customers facilitating their economic and social life.
1.1.2 INTRODUCTION TO SELECTED BANKS

1. STANDARD CHARTED BANK NEPAL LIMITED

Standard Chartered Bank Nepal Limited has been in operation in Nepal since 1987 when it was
initially registered as a joint-venture operation. 75% shares are owned by Standard Chartered
Group & rest 25% shares owned by the Nepalese public. The Bank enjoys the status of the largest
international bank currently operating in Nepal. With 20 branches & 24 ATMs across the country
& with more than 450 local staff, SCBNL. is in a position to serve its clients & customers through
an extensive domestic network. In addition, the global network of Standard Chartered Group
haven given the Bank unique opportunity to provide truly international banking services in Nepal.

SCBNL offers a full range of banking products & services to a wide range of clients & customers
encompassing individuals, mid-market local corporate, multinationals, large public sector
companies, government corporations, airlines, hotels segment comprising of embassies, aid
agencies, NGO’s & INGO’s. The Bank has been the pioneer in introducing 'customer focused'
products & services in the country & aspires to continue to be a leader in introducing new
products in delivering superior services. It is the first Bank in Nepal that has implemented the
Anti-Money Laundering policy & applied the 'KYC’ procedure on all the customer accounts.

2. HIMALAYAN BANK LIMITED

Himalayan Bank Limited is one of the largest private banks of Nepal. It 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. HBL 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.

Despite the cutthroat competition in the Nepalese Banking sector, HBL has been able to
maintain a lead in the primary banking activities with the highest deposit base and loan
portfolio amongst private sector banks and extending guarantees to correspondent banks
covering exposure of other local banks under its credit standing with foreign
correspondent banks. Legacy of Himalayan lives on in an institution that's known
 throughout Nepal for its innovative approaches to merchandising and customer service.
HBL has a total network of 44 branches with co-operate head office of the bank is in
Kamaladi, 1 card centre & 16 branches operated inside the valley & 26 branches operated
outside the valley & with 75 ATM outlets across the Country. HBL committed to
providing a quality service, with a personal touch, to its valued customers. All customers
are regarded as valued clients & treated with utmost courtesy.

The Bank, wherever possible, offers teller facilities to its clients, to meet unique needs &
requirements of different clients. To further extend the reliable & efficient services to its valued
customers, HBL has adopted the latest banking technology & 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 & Internet Banking to customers & will be introducing more services like these
in the near future.

1.2 FOCUS OF THE STUDY

Financial institution assists in the economics development of the country. The concept of financial
institution in Nepal was introduced when the first commercial bank Nepal Bank Limited was
established in 30th Kartik 1994 B.S. as a semi government organization. In the fiscal year 2039/40,
the concept of new banking policy was introduced for the establishment of new bank by the joint
investment of foreign countries known as joint venture.

The establishment of joint venture bank gave a new prospect to the financial sector of the country.
Commercial banks are the heart of the financial system that plays significant role by collecting
surplus funds & delaying these funds in the productive sector as an investment in banks.

Banks are business organization where monetary transaction occurs. It creates funds from its
clients saving in the form of deposits & lends the funds to the people who needs or business firm
in the form of loans & advances & investment. Proper financial decision-making is more in the
banking transaction for its efficiency & profitability. Most of the financial decisions of banks are
concerned with current assets & current liabilities.
Working capital management of a bank is different from that of other business enterprise. A bank
plays a significant role to fulfill the requirement of working capital of any other type of business
enterprise. Investment in working capital of other business enterprise is a part of current assets of
the bank. Working capital considers deposits & short-term borrowing as a part of current
liabilities. In this study the working capital management in commercial banks has been presented,
analyzed, & summarized.

1.3 STATEMENT OF THE PROBLEM

Working capital management has been regarded as one of the conditioning factor in decision-
making. The management of working capital is identical to the management of short-term
liquidity. It regards as blood & nerve of a business concern & it is essential to accommodate the
smooth operation of the firm. Under & over allocation of working capital is harmful to an
enterprises to achieve its primary objectives & therefore maintain the optimal level of working
capital is the core problem as it is strongly related to trade off between risk & return. However, it
is difficult to point out as to how much working capital is needed by the particular business
organization.

An organization, which is unwilling to take more financial risk, can go for short-term liquidity.
The more of short-term liquidity means more of current liabilities that imply less short term
financing so it is essential to analysis & find out the problem & its solution to make efficient use
for funds to minimize the risk of loss to attain its profit objective.

In adequate investment in working capital threatens the solvency of an 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 the total cost of liquidity &
total cost of non-liquidity is minimum. Hence, the goal of the working capital is to manage the
firm’s current assets & current liabilities in such a way it should maintain satisfactory level.

Working Capital Management for the banks is more difficult than the of manufacturing & non-
manufacturing business organization. Commercial banks have great monetary institution, which
plays an important role in the welfare of the economy. The responsibility of commercial banks is
more than any financial institution. Banks collects funds from different types of deposits for
providing loans & advances to different sectors. In order to get higher return the bank must try to
increase the funds from deposits & investments.

The motive of banking business is to borrow public saving & lend to needy people but
commercial banks always faces the problem for utilizing more deposits as investment &
productively. The gap between collection of deposits & payment of loans increases the cash
balance on bank that requires paying large amount of liabilities of the banks. Therefore, the
following are the major problem that has been identified for the purpose of this study:
1. What is the bank’s image in relation to working capital management?
2. What are the major factors affecting the management of working capital in the commercial
banks of Nepal?
3. What are the components of working capital, which affects the operating income of the
commercial banks in Nepal?
4. What are the lending pattern of loans & advances & other investment of the banks?
5. How have the bank been raising the required funds. Is the funds properly & productively
utilized or not?
6. How have the bank utilizing their debt?

1.4 OBJECTIVE OF THE STUDY

Objectives are the guidelines by the statement describing the plan of the researcher in clear
measurable term. This is done so that a clear understanding of exactly which variables to
investigate & what type of data you are dealing with. It may also clearly indicate the research
problem & study design. The main objective of the study is to examine the management of
working capital in commercial banks. The specific objectives of this study are:
1. To evaluate the working capital position of the selected commercial banks.
2. To evaluate the working capital financing policy adopted by the banks.
3. To examine the factors affecting the management of working capital.
4. To indicate the liquidity, capital structure & profitability position of banks over the year.
5. To show the relationship between various correlation coefficient.
1.5 SIGNIFICANCE OF THE STUDY

Working capital is the size of investment in each type of current assets. Each of the current assets
should be managed efficiently & effectively. The decision regarding working capital affects not
only the profitability of the firm in the short term but also its very survival in the end.

As commercial bank in Nepal exacting greater influence in the economy of the country &
effective & efficient management of their current assets is needed to better the profitability of the
firm. The need of the study like this arises from the real nature of the banking business & forms
the impact that it has economy of the country because the business of banks is to accept deposits
& loans depending upon the working capital policy.

The study of this type will be most important for the bankers, economists & the public at large. It
provides the literature to the researcher who wants to carry on further research in this field.
Therefore, it has been felt very necessary to evaluate the position of working capital management
& to focus on the importance of the capital management of the banks.

1.6 LIMITATION OF THE STUDY

None of the study can go beyond the boundary of some limitations. The scope of the study has
been limited in terms of period of study as well as sources & nature of the data. The following are
some of the limitations of the study:
1. This study is based on secondary data only & the study is focused on the balance sheet &
profit & loss account have been maintain by the banks published in annual report where the
information were given in reduced form.
2. Only main financial & statistical tools are been used for analyzing the working capital
management.
3. Out of 30 A Class commercial banks this study of working capital management it is only
concerned with the selected banks.
4. The period coverage by the study extends the period of five years period from the F/Y
2009/10 (2066/67) to 2013/14 (2070/71).
5. Although there are various aspects of financial management, this research is study mainly
concerned with the working capital management aspects of the selected banks.
1.7 ORGANIZATION OF THE STUDY

This study will be organized into following five chapters

Chapter 1: Introduction

This chapter generally deals with the background of the study, a brief review of some of the
selected banks, focus of the study, statement of the problem, objectives of the study, significance
of the study & limitation of the study in working capital management.

Chapter 2: Review of Literature

This chapter deals with the conceptual framework & review of literature including the
fundamental concept & tools of working capital management. it also includes the brief review of
previous research work.

Chapter 3: Research Methodology

This chapter deals with the research methodology, which has been followed to achieve the
purpose of the study. This chapter consists of research design, population, & sample, sources of
data, data processing & analysis & tools & techniques of analysis.

Chapter 4: Data Presentation & Analysis

This chapter deals with the presentation & analysis of data. It gives a clear picture of how the
collected data has been presented on the study & how it has been analyzed.

Chapter 5: Summary, Conclusion & Recommendations

This chapter deals with the whole summary of the study; conclusion is drawn on the base of major
findings & recommendations made based on conclusion & major findings this research study.
 CHAPTER 2
REVIEW OF LITERATURE

2.1 INTRODUCTION

This chapter highlights upon the literature that is available in this relative topic. This chapter is
divided into two parts. First part deals with the conceptual framework of commercial banks &
working capital management. Second part deals with relating of some available literature
including review of books, journals, articles, & dissertation & research gap of the thesis.

2.2 CONCEPT OF WORKING CAPITAL MANAGEMENT

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 firm’s 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
& 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 & 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 firm’s those items that can be
converted into cash with in the year. Net working capital is defined as the difference between
current assets & current liabilities.
(Hampton & Wagner, 1989)

The investment for the working capital may be transferred into cash within a short period,
generally a year. Therefore, 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 & 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 that 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. These current assets are cash in hand,
cash at bank, bills receivable, sundry debtors inventory, prepayments, loans 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. These current liabilities are bank
overdraft, sundry creditors, bills payables, outstanding expenses, received in advance cash credit
etc.

There are two schools of thoughts or concepts regarding the meaning of working capital.
According to one school of thought, working capital is meant for the currents assets only. It is
concerned nothing with the liabilities side. According to other school of thought, working capital
is the excess of current assets over current liabilities.

The former concept which can be termed as gross concept, is important to newly established
companies where liabilities have not been acquired immediately, but the lattes one which can be
term as net concept is important for both newly established & operating concerns where some
amount of current liabilities has been maintained for payment of different creditors, income taxes,
bill payable, secured & unsecured loan etc.

The term current assets refers to those assets which in the ordinary course of business can be or
will be turn into cash within one year without undergoing or diminishing in value & without
disrupting the operations of the firm such as cash, Marketable securities, accounts receivables &
inventory etc. current liabilities are those liabilities which are intended at their inception to be
paid in the ordinary course of business such as accounts payable, bank overdraft & outstanding
expenses etc .Mainly there are two concepts of working capital gross concept & net concept.

a. Gross Working Concept

In a simple term gross concept of WC means investment in current assets in other words, gross
working capital is the total amount of available for financing of current assets. However, it does
not show the real financial position of a business firm.

According to this concept, the working capital may be classified as capital invested in the various
types of current assets such as cash, inventories, receivables etc. This classification important
from financial manager's point of view as it lays emphasis on the various areas of functional
responsibility but it totally ignores the time that is very important in the formulation of
procurement policies. Gross working capital refers to the firm’s investment in current assets. CA
are the assets which can be converted into cash within an accounting year & include cash short-
term securities debtors bills receivables & stock.
(Pandey, 1995)

The Reasons given for the concept of Gross working capital not consider current liabilities at all
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 & their forms keep on changing. Therefore, they should be considered as
working capital.

b. Net Working Concept

Gross concept of WC is the narrow concept, which is only concerned with the study about total
investment of current assets. In the other hand, net concept of WC is a broad concept, which
focuses to long-term view of working capital. Under the concept of net working capital, it studies
current assets & current liabilities as differently. Today's market is diverse every changed in
environment & other factor's bring changes of demand needs & wants of customers at the same
time so every business firms have to be made their WC policies to fit the new environment thus,
net working capital concept should be studied to know the portion of current liabilities. How
much current liabilities should be managed to how much current assets?

Net working capital is an accounting concept, which represents the excess of current assets over
its current liabilities. Current assets consists of cash & bank balance, stock, debtors, bills
receivables etc & current liabilities consists bills payable, creditors, outstanding expenses etc.
Excess of current assets over current liabilities, thus, it indicates the liquidity position of an
enterprises.

The term net, working capital refers to “The difference between current assets & current
liabilities.” Current liabilities are those claims outsiders, which are expected to nature for payment
within an accounting year & include creditors, bills payable & outstanding expenses. Net working
capital can be negative or positive. A positive WC will be arising when capital occurs when
current liabilities are in excess of current assets.
(Pandey, 1995)

2.3 CLASSIFICATION OF WORKING CAPITAL MANAGEMENT

The amount of funds needed for meeting requirements normally varies from time to time in every
business. However, business always needs certain amount of assets in the form of working capital
to carry out its functions. There are two type of working capital in company.
 Permanent or fixed working capital &
 Temporary or variable working capital.

a. Permanent or Fixed Working Capital

The amount of working capital required for the business to maintain a minimum level of current
assets for the whole period is called permanent working capital. Permanent working capital is also
known as fixed working capital. It is comprises of minimum cash balance, minimum level of
inventory etc. The nature of this capital is similar to the capital invested in the fixed assets. Both
these capital cannot be withdraws from the business. Financing of this working capital by using
short- term sources needs to renew the loan respectively. If the suppliers of fund of disagree to
renew the loans, firm has to go for fresh loan to repay the exiting short-term debt. The compulsion
of taking loan within a short period may cause an increase in the rate of interest. Much of the time
of financial manager will spent on the renewal & management of loan. Therefore, it is desirable to
finance the permanent working capital by using long- term sources like long –term debt or equity.
Requirement of permanent working capital may increase due to inflation or growth in sales. This
incremental requirement of permanent working capital can be financed by using internal sources.
The permanent or fixed working capital is divided into:

i. Regular Working Capital

It is the minimum amount of liquid capital required to keep up the circulation of the capital from
cash to inventories to receivables & back again to cash. This would include a sufficient amount of
cash to maintain reasonable quantities of raw materials for processing into finished goods to
ensure quick delivery etc.

ii. Reserve Margin or Cushion Working Capital

It is extra capital required to meet unforeseen contingencies that may arise in future. These
contingencies may crop up on account of rise in prices, business depression, strikes, lock-outs,
fires & unexpected competition. It is needed over & above the regular working capital
requirements.

b. Temporary or Variable Working Capital

In most business the required of working capital may be high during a particular season & it
comes down during other periods. This additional portion of working capital, which is required
during peak business season, is known as variable or temporary or seasonal working capital.
Variable working capital is required during peak season only.

This portion of working capital can withdraw from the business after end of such season.
Therefore, it is desirable to finance the temporary working capital from short- term external
sources like trade credit, commercial paper, arrangement of other short-term loan from the bank.
Because such short- term loans can easily repaid after the peak business season. If this portion of
this working capital is financed through permanent or long- term sources, this fund will either
remain idle or invested in marketable securities earning at a lower rate. As a result the earning of
the company will be adversely affected. The variable working capital fluctuates with the volume
of business. The temporary or variable working capital is divided into:
i. Seasonal working capital

The capital required to meet the seasonal demands of the enterprise is called seasonal working
capital. It refers to liquid capital needed during the particular season. During the season, the
business enterprises have to push up purchase of raw materials & employee more people to
convert them into finished goods & thus require large amount of working capital. Seasonal
working capital being of short-term nature, it has to be financed from short-term sources like bank
loan etc.

ii. Special working capital

It is that part of the variable capital, which is needed for financing special operations such as the
organisation of special campaigns for increasing sales through advertisement or other sale
promotion activities for conducting research experiments or execution of special orders of
Government that will have to be financed by additional working capital.

The distinction between permanent working capital & temporary working capital is important in
arranging the finance for an enterprise. Permanent Working Capital should be raised in the same
way as fixed capital is procured. It is undesirable to bring regular working capital into business on
a short-term basis because a creditor can seriously handicap the business by refusing to continue
lending permanently. Its only recourse is to curtail operations unless another lender can be found.
Temporary Working Capital requirement can, however be financed out of short term loans from
the banks or inviting public deposits.

2.4 SOURCES OF WORKING CAPITAL MANAGEMENT

The required of the working capital depends upon the organization objectives, time situation, &
time. This suggests that dependence on only one or specific sources of capital may create
obstacles & problems. Therefore, the enterprise has to use combination of one or more sources of
capital in management of working capital. After ascertaining the amount of working capital
needed to the enterprises, permanent capital can be collected from capital market where as
working capital collected from money market. According to nature of working capital, the sources
of working capital management are divided into long-term sources & short-term sources of
working capital.
(Kuchhal, 1998)
a. Sources of Permanent or Fixed Working Capital

Long-term sources are used to meet the requirement for permanent or fixed working capital. Main
sources are Issue of Shares, Issue of Debenture, Public Deposits, Reinvestment of profit, financial
institutions, etc.

i. Issues of Shares

The enterprises can issues ordinary & preference share taking consideration on capital structure of
enterprises for the collection of permanent working capital. Issues of preference share is better
than to issues ordinary share to collect working capital because a redeemable preference share can
be returned when firm does not need it.

ii. Issue of Debenture

When the working capital requirement is permanent & non-seasonal, the corporation can issues
debenture, being a fixed burden on corporate earnings. The managerial board will be free from
debenture-holders who have no any right on management & control of enterprises.

iii. Public Deposit

Public deposits refer to the unsecured deposits invited by companies from the public mainly to
finance working capital needs. A company wishing to invite public deposits makes an
advertisement in the newspapers.

Any member of the public can fill up the prescribed form and deposit the money with the
company. The company in return issues a deposit receipt. This receipt is an acknowledgement of
debt by the company. The terms and conditions of the deposit are printed on the back of the
receipt. The rate of interest on public deposits depends on the period of deposit and reputation of
the company. A company can invite public deposits for a period of six months to three years.
Therefore, the public deposits are primarily a source of short-term finance. However, the deposits
can be renewed from time-to-time. Renewal facility enables companies to use public deposits as
medium-term finance.
iv. Reinvestment of Profit
These important sources of permanent working capital are generated from the business operation
in profit. Required permanent working capitals are fulfilled from the retained earnings, which is
the same portion of profit without distributing to shareholders.

v. Financial Institution

A financial institution is an institution that provides financial services for its clients or members.
One of the most important financial services provided by a financial institution is acting as a
financial intermediary. Most financial institutions are regulated by the government. The reliable
sources of permanent working Capitals are commercial banks, financial institution & other
organized institution. They provide short term or mid-term loan facilities.

b. Sources of Temporary or Variable Working Capital

The short-term sources are used to meet the requirement of working capital. Some special variable
working capital sources are .Trade Credit, Commercial Papers, Instalment Credit, Letter of Credit,
etc.

i. Trade Credit

The trade credit is the most popular sources of working capital. Sellers provide credit to buyers for
short period without any mortgage, which is termed as trade credit. “The trade credit means
providing credit by one business to another business. The supply of goods or services by
producers to other firms like retail traders for some time without making immediate payment is an
example to trade credit”.
(Joshi & Dangol, 2056)

ii. Commercial Papers

Commercial paper, in the global financial market, is an unsecured promissory note with a fixed
maturity of no more than 270 days. It is a money-market security issued (sold) by large
corporations to obtain funds to meet short-term debt obligations (e.g.: payroll) & is backed only
by an issuing bank or corporation's promise to pay the face amount on the maturity date specified
on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a
recognized credit rating agency will be able to sell their commercial paper at a reasonable price.
Commercial paper is usually sold at a discount from face value, & carries higher interest
repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest
rate the issuing institution pays. Interest rates fluctuate with market conditions, but are typically
lower than banks' rates.

iii. Instalments Credit

Sometimes, instalment credit is granted by financial companies or commercial banks which have
special arrangements with the suppliers. Machinery or equipment may also be supplied on hire
purchase basis. Some portion of the cost price of the asset is paid at the time of delivery & the
balance is paid in number of instalments along with interest. Under this system, the purchaser
becomes the owner only when all the instalments are paid.

iv. Letter of Credit

A letter of credit is a document from a bank guaranteeing that a seller will receive payment in full
as long as certain delivery conditions have been met. In the event that the buyer is unable to make
payment on the purchase, the bank will cover the outstanding amount. They are often used in
international transactions to ensure that payment will be received where the buyer & seller may
not know each other & are operating in different countries. In this case the seller is exposed to a
number of risks such credit risk, & legal risk caused by the distance, differing laws & difficulty in
knowing each party personally.

A letter of credit provides the seller with a guarantee that they will get paid as long as certain
delivery conditions have been met. For this reason the use of letters of credit has become a very
important aspect of international trade. The bank that writes the letter of credit will act on behalf
of the buyer & make sure that all delivery conditions have been met before making the payment to
the seller.

2.5 OBJECTIVES OF WORKING CAPITAL MANAGEMENT IN BANK

A bank undertakes many transactions daily. Sometimes, customers deposit large quantity &
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 pay the money
to depositors. When they want to withdraw. For daily operation of office & to meet the
administrative expenses, a bank should have certain level of working capital. Working capital is
required to run the business smoothly & 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. Hence, the objectives of working capital
management are as follow:
1. To pay to depositors,
2. To maintain Cash Reserve Ratio & Statutory Liquidity Ratio.
3. To satisfy the customers by granting loans promptly & increase the attraction of business etc.
4. To meet the administrative expenses, perform the task as per objectives of business & run the
business smoothly,
5. To fulfil the present need of business as well as get ready for risk & economic fluctuation in
future.

2.6 IMPORTANCE OF WORKING CAPITAL MANAGEMENT

Working capital is the lifeblood & nerve centre of business. Working capital is very essential to
maintain smooth running of a business. No business can run successfully without an adequate
amount of working capital. The main importance of working capital are as follows:

1. Strengthen the Solvency:

Working capital helps to operate the business smoothly without any financial problem for making
the payment of short-term liabilities. Purchase of raw materials & payment of salary, wages &
overhead can be made without any delay. Adequate working capital helps in maintaining solvency
of the business by providing uninterrupted flow of production.

2. Enhance Goodwill:

A firm with sufficient working capital enables a business concern to make prompt payments &
hence helps in creating & maintaining goodwill. Goodwill is enhanced because all current
liabilities & operating expenses are paid on time.
3. Easy Obtaining Loan:

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

4. 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 & other day-to-day commitments.
By paying these expenses regularly at time, the morale of employee’s increases on one hand & on
the other, their efficiency also increases.

5. Regular Supply of Raw Material:

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

6. 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 & hence it
reduces the cost.

7. 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.
8. Quick & regular return on investments:

Every investor wants a quick & regular return on his investments. Sufficiency of working capital
enables a concern to pay quick & regular dividends to is investor as there may not be much
pressure to plough back profits which gains the confidence of investors & creates a favourable
market to raise additional funds in future.

2.7 FACTORS AFFECTING WORKING CAPITAL MANAGEMENT

The importance of efficient working capital management is an aspect of overall financial

management. Thus, a firm plans its operation with adequate working capital requirement or it
should neither too excess nor too inadequate working capital. However, there are no sets of rules
to determine the working capital requirements of the firm. It is because of a large number of
factors that influence the working capital requirement of the firm. A number of factors affect
different firm in different ways. Internal policies & environment change also affect the working
capital. Generally, the following factors affect the working capital requirements of the firm.

1. Nature of the Business:

Working capital requirement depends upon the nature of business carried by the firm. Normally,
manufacturing industries & trading organizations need more working capital than in the service
business organizations. A service sector does not require any amount of stock of goods. In service
enterprises, there are less credit transactions. But in the manufacturing or trading firm, credit sales
& advance related transactions are in large amount. Therefore, they need more working capital.

2. Size of the Business:

The working capital requirement of a firm is directly influenced by the size of its business
operation. Big business organizations require more working capital than the small business
organization. Therefore, the size of organization is one of the major determinants of working
capital.
3. Growth & Expansion of Business:

Growth & expansion also affect the working capital requirement of a firm. However, it is difficult
to precisely determine the relationship between the growth & expansion of the firm & working
capital needs. But the other things being the same growing firm needs more working capital than
those static ones.

4. Production Policies:

Depending upon the kind of items manufactured, a company is able to offset the effect off-
seasonal fluctuations upon working capital by adjusting its production schedules. The choice rests
between varying output in order to adjust inventories to seasonal requirements & maintaining a
steady rate of production & permitting stocks of inventories to build up during off-season periods.
It will thus be obvious that a level production plan would involve a higher investment in working
capital.

5. Manufacturing Cycle:

Manufacturing cycle starts with the purchase & use of raw material & completes with the
production of finished goods. Longer the manufacturing cycle larger will be the firm's working
capital requirements. An extended manufacturing time span means large tie-up funds in stocks.
Thus if there are alternative way of manufacturing cycle should be chosen, once a manufacturing
process has been selected , it should be ensured that manufacturing cycle is completed within the
specified period . This need proper planning & coordination at all levels of activity non
manufacturing firm financial & service oriented enterprises do not have manufacturing cycle.
(Pandey, 1995)

6. Terms & condition related to Purchases & Sales:

Credit terms & conditions of sales & 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 & 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 receivables. Higher book debts mean more working capital.
7. Access to Money Market:

The level of working capital to be maintained by the firm is also determined by the capacity of the
firm to borrow on short notice. If a firm has good relationship with the financial institution then it
can raise short-term borrowing at a very short notice so that the working capital requirement is
reduced.

8. Price Fluctuation:

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 & other relevant
considerations.

9. Profit Margin:

The level of profit margin differs from firm to firm. It depends upon the nature & quality of
products, marketing management & monopoly power in the market .If the firm deals with the high
quality product & has a sound marketing management & enjoyed the monopoly power in the
market then it earns quite high profit & vice-versa. Profit is the source of working capital, because
it contributes towards the working capital as a pool by generating more internal funds.

10. Dividend Policy:

Dividend policy is a significant element in determining the level of working capital in an

enterprise. The payment of dividend reduces the cash & thereby, affects the working capital to
that extent. On the contrary, if the company does not pay dividend but retains the profits,
more would be the contribution of profits towards capital pool.
11. Level of taxes:

The level of taxes is one of the important elements, which is also influences working capital
requirement of a firm. The amount of taxes to be paid in advances is determined by the prevailing
tax regulations. However, the firms profit is not constant or can't be predetermined. Tax liability
in a sense of short- term liquidity is payable in cash. Therefore the provision for tax amount is one
of the important aspects of working capital planning. If tax liability decrease, it needs to decrease
the working capital.

12. Level of Competition:

If the market is competitive then company will have to adopt liberal credit policy & to supply
goods on time. Higher inventories have to be maintained so more working capital is required. A
business with less competition or with monopoly position will require less working capital as it
can dictate terms according to its own requirements.

13. 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.

2.8 MANAGEMENT OF WORKING CAPITAL

Working capital management involves the relationship between a firm's short-term assets & its
short-term liabilities. The goal of working capital management is to ensure that a firm is able to
continue its operations & that it has sufficient ability to satisfy both maturing short-term debt &
upcoming operational expenses. The management of working capital involves managing cash,
accounts receivable & inventories.
(Paudel, Baral, Gautam & Rana, 2007)
A. Cash Management:

Cash constitute the most readily acceptable item of current assets. It includes items such as
currency coins, cheques, marketable securities etc. some of these items such as currencies, coins,
cheque are readily available in cash & some items such as treasury bills, commercial papers, other
marketable securities are readily convertibles into cash.

The financial manager must ensure that neither there are excess nor insufficient of cash balances
as well as it must be held sufficient amount. Holding excess amount of cash contributes nothing to
the profitability of the firm because idle cash earn nothing to the firm & insufficient of cash puts
an obstruction in the process of production.

Cash management is concerned with the management of cash inflows & cash outflows within the
organization. It also includes the matter relating to financing the deficit & investment of surplus
cash to maintain the optimum cash balance. If cash flow were accurately predicted the firm would
not have to be serious about management for the cash.

Cash outflows to some extent are certain but cash inflows cannot be predicted accurately.
Sometime cash outflows exceed inflow due to unusual payment of obligation & seasonal build up
in inventories & receivables. Therefore, the financial manager must consider certain strategies to
overcome the uncertainty about cash flow prediction & to maintain coincidence in cash inflows &
cash outflows.
(Paudel, Baral, Gautam & Rana, 2007)

B. Inventories Management:

Inventory management is that aspect of the firm’s working capital management, which is
concerned with, maintains optimum investment in inventory & applying effective control system
of inventory to minimize the total inventory cost. Inventory is such type of current assets, which
involves significant investment in funds. As firm’s goes on investing more in inventories the cost
of funds being tied up will also increases. Therefore, inventory management significant because it
enables to resolve two conflicting issues regarding the inventory management of the firm
 Maintaining insufficient inventory for smooth production & selling activities &
 minimizing investment in inventory to enhance firm’s profitability
Investment in inventory should be optimum neither excess nor insufficient. excessive investment
in inventory results into higher cost of funds being tied up so that it reduces the profitability due
to which the inventories may be misused lost damaged & holds cost in the terms of more space &
others. At the same time, insufficient investment in inventory creates stock-out problems,
interruption in production & sales.

Therefore, the firm may lose their customers as they shift to the competitors. Therefore, the
financial manager should always try to hold optimum level of investment in inventory in order to
run the production & sales operation smoothly.
(Paudel, Baral, Gautam & Rana, 2007)

C. Receivables Management:

Receivables also termed as trade credit or debtors are the component of current assets that results
through credit sales. Accounts receivables are the money receivables in the future for the sale of
the product & services in the present. In the present context corporate organisation significant
amount of transaction are performed in term of credit.

Receivable management is that aspect of the firm‘s working capital management which is
concerned with determining credit policy associated to the form as such that the benefit from
extension of credit is greater than the cost of maintain investment in account receivables. The
receivables management of the firm is considered significant because it requires a trade off
between costs & benefits associated.

The fundamental goal of receivables management is to promote company’s sale & profit to extent
where return on investment in Accounts receivables remains more than cost of using the
additional funds to finance the receivables. Generally, the firm’s financial manager directly
controls accounts receivables through involvement in the establishment & management of credit
policy. The basic purpose of the firm’s receivables management is to determine the effective
credit policy that increases the efficiency of the firm’s credit & collection department &
contributes to maximization of the value of the firm.
(Paudel, Baral, Gautam & Rana, 2007)
2.9 CASH CONVERSION CYCLE

Firm’s liquidity has two major aspects ongoing liquidity and protective liquidity. ‘Ongoing
liquidity’ refers to inflow & outflow of cash through the firm as the product acquisition,
production sales payment and collection takes place over time. ‘Protective liquidity’ refers to the
ability to adjust rapidly to unforeseen cash demands & to have backup means available to raise
cash.

The firm’s ongoing liquidity is the function of cash conversion cycle. As raw materials are
purchased, the firm’s current liabilities increase in the form of accounts payable. Subsequently,
the firm pays for these purchases. During the same time, the raw materials are converted into
finished goods through the production process & then they are sold either for cash or in credit. In
later case, receivables are created. Finally, the account receivables are collected, resulting into
cash inflow. Ongoing liquidity is influenced by all aspects of the cash conversion cycle, since
increase in purchase; inventory or receivables will decrease liquidity. A decrease in any of the
three will increase ongoing liquidity.

The cash conversion cycle represents the net time intervals in days between actual cash
expenditure of the firm & the ultimate recovery of cash. The cash conversion cycle model focuses
on the length of time between the company makes payment & when it receives cash inflows. It is
calculated as
Cash conversion Cycle = Operating Cycle – Payable Deferral Period
A firm’s operating cycle has two components: Inventory conversion period & Receivables
collection period.

A. Inventory Conversion Period:

Inventory Conversion Period is refer to the length of time, required for converting raw materials
into finished goods & into sales. It is calculated as average receivables divided credit sales per
day.
Inventory Conversion Period= Average Inventory x 365 days
Cost of Goods Sold
B. Receivables Collection Period:

Receivables Collection Period is refer to as days outstanding or average collection period is the
average length of time required to collect accounts receivable after products have been sold in
credit. It is calculated as average receivables divided credit sales per day.

Receivables Collection Period = Average Receivables x 365 days

Credit Sales

C. Payable Deferral Period:

Payables Deferral Period is refer as the average length of time between purchases of material,
labour & the payment of cash for them. It is calculated as payables divided average credit
purchase per day.

Payable Deferral Period = Payables x 365 days

Credit Purchases

2.10 WORKING CAPITAL POLICIES

Working capital policy refers to the firm's basic policies regarding target level of each category of
current assets & how current assets will be financed.
(Weston & Brigham, 1996)

The firm has to determine how much funds should be invested in working capital in gross
concept. Every firm can adopt different financing policy according to the financial manager’s
attitude towards the risk return trade off. One of the most important decisions of finance manager
is how much current liabilities should be used to finance current assets. Working capital policy
refers to the firm’s basic policies regarding target levels for each category of current assets & how
current assets will be financed. Working capital policy is categories in two parts, Working Capital
Investment Policies & Working Capital Financing Policies
 i. Working Capital Investment Policies:

Working capital investment policy refers to the policy regarding the total amount of current assets
to be carried to support the given level of sales. How much a firm will invest in CA will depend
on its operating cycle. There are three alternative working capital investment policies. These are:
fat cat, lean & mean, & moderate.

1. Relaxed Working Capital Investment Polices (Fat Cat Policy):

In this policy, the firm holds relating large amount of amount of cash, marketable securities,
inventories, receivables & other types of current assets. This policy creates larger inventory &
cash conversion cycles. It also creates the larger receivable collection period due to the liberal
credit policy. Thus, this policy provides the lowest expected return on investment with lower risk.

2. Restricted Working Capital Investment Policy (Lean & mean policy):

Under this policy, the firm holds the minimum amount of cash, marketable securities, inventories,
receivable & other current assets are reduced. Under this policy firm follows a light credit policy
& bears the risk of losing sales.

3. Moderate Policy:

In this policy investment in current assets should not be as maximum as in relaxed policy & it
should not be as minimize as in restricted policy. Both, excess investment in current assets &
inadequate investment in current assets are not good. Therefore, there should be optimum
investment in current assets. Both risk & return are moderate in this policy.

ii. Working Capital Financing Policies:

It is the manner in which the permanent & temporary current assets are financed. Current assets
are financed with funds raised from different sources. But cost & risk affect the financing of any
assets. Thus, working capital financing policy should clearly outline the sources of financing.
There are three policies. These are – aggressive, conservative & matching or hedging policies of
current assets financing.
1. Aggressive Policy:

Under this approach, temporary current assets & some parts of permanent current assets are
financing with short term debt. In other words, the firm finances a part of its permanent current
assets with short term financing & rest with long term financing. In this policy, the liquidity
position will be low & the risk will be high.

A business firm uses relatively large amount of short term debt. Short term debt is more risky
because the firm should be able to repay the short term debt with in short time period. If it could
not pay its debt with in short time period, there will be high probability of bankruptcy of that firm.

2. Conservative Policy:

In this policy, permanent current asses & a larger portion of temporary current assets are financed
with long term debt & equity & only a small portion of temporary current assets is financed with
short term debt. The cost of financing in this policy will be more, the liquidity will be relatively
greater & risk will be minimized.

3. Matching Policy:

In this policy, permanent current assets are financed with long term debt & equity & temporary
current assets are financed with short term debt. According to this policy, source of short term
financing should be determined according the maturity of current assets. It lies in between the
aggressive & conservative policies. It deals to neither high nor low level of current assets &
current liabilities.

2.11 MOTIVES FOR HOLDING CASH IN WORKING CAPITAL

Most of firms aim at maximizing the wealth of shareholders. The firms should earn sufficient
return from its operation. The extent to which profit can be earned naturally depends upon the
magnitude of sales among the other things. Specially, working capital required to spend on raw
materials, salary, wages, rent, electricity, advertisement and other sales related expenses. The need
for working capital can be categorized into the following ways. Generally, banks need liquidity
for maintaining following goals:
1. Transaction Motive:

A business firms holds cash for smooth running of business. The conduct its ordinary business &
making purchases & sales, working capital is needed. In the business, where billings are
predictable cash inflows, can be scheduled & synchronized with the need for the cash outflow. In
a seasonal business more cash may be needed & if firms want to operate transaction smoothly,
they have to keep inventory of raw materials & finished goods.

Generally, a business firm invests on marketable securities that can be converted into cash in a
short time. It is temporary investment. So, to run business smoothly in an uninterrupted basis, a
business firm has to manage working capital for transaction motive.

2. Precautionary Motive

Precautionary motive is the need to hold cash & inventories to guard against the risk of
unpredictable change in demand & supply forces & other factors such as strike, failure of
important customers, unexpected slow down in collection of account receivable, cancellation of
some order for goods & some other unexpected emergency. Thus, the firm needs the working
capital to meet any contingencies in future.

3. Speculative Motive

The working capital is needed to meet the speculative motive, which refers to the desires of a firm
to take advantage of the following opportunities.
 Opportunities of profit making investment.
 An opportunity to purchase raw material at a reduced price on payment of immediate cash.
 To speculate on interest rate &
 To purchase at favourable price, etc.
 To grab these opportunities, the business enterprises have &
 To manage cash & marketable securities.
4. Compensation Balance Motive

The commercial bank performs many functions for business firms. Sometimes, firm pays service
charge by direct fee and sometimes by maintaining compensation balance. Compensation balance
is the advance deduction bank on loan. It represents that the firm agrees to maintain in its
checking account with the bank. With this assurance, the bank can provide such funds as long-
term loan.

2.12 REVIEW OF BOOKS

Weston & Brigham (1996) in their book “Managerial Finance” have given theoretical insights
into working capital management. The bond conceptual findings of their study provide sound
knowledge & guidance for the further study in the field of management of working capital of any
enterprise & 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 & their effective management techniques.
The components of working capital they have dealt with the cash, marketable securities,
receivable & inventory for the efficient management of cash, they have explained the different
cash management models. They have also explained the major sources & forms of short term
financing, such as trade credit, loans from commercial banks & commercial paper.

Pradhan (1988) has published a book on management of working capital in Nepalese Public
Enterprises. This book is based on the study of nine manufacturing public enterprises of Nepal for
the duration of ten years from 1973 to 1982 A.D. 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:
1. To conduct risk return analysis of liquidity of working capital position.
2. To assess the short term financial liquidity position of the enterprises.
3. To assess the structure & utilization of working capital &
4. To estimate the transaction demand functions of working capital & its various components.

His study has mentioned the following findings.

1. It was found that most of the selected enterprises have been activating a trade-off between risk
& return thereby following neither an aggressive nor a conservative approach.
2. 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.
3. 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 was the largest followed by receivables & cash in most of
the selected enterprises?
4. The economics of scale have been highest for inventories followed by cash & gross working
capital, receivable & net working capital.
5. The regressions results also show that the level of working capital & its components &
enterprise desires to hold depend not only on sales but on holding costs also.

Van Horne (2000) another well known expert of financial management & writer in his book
“Financial Management & 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 & 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, & the inter-relationship that exist between them. He has also described the
different methods for efficient management of cash & marketable securities & various models for
balancing cash & marketable securities. For the management of receivable, different credit &
collection policies have been described & various principles of inventory have been examined for
inventory management & control.

2.13 REVIEW OF RELATED ARTICLES/ JOURNALS

Journals, articles, & bulletins are of great significance for thesis writing. Therefore, various
published & unpublished articles by different experts & journals & bulletins relating to working
capital have been revised.

K. M. Shrestha (1982) in his study “Working Capital Management in Public Enterprises", based
on ten selected public enterprises. The sample public enterprises are national trading ltd,
Raghupati Jute Mills, Birgunj Sugar Factory, Janakpur cigarette Factory, Dairy Development
Corporation, Royal Drugs Ltd, Harisiddhi Brick & Tire Factory, National Construction Co. of
Nepal, Nepal Cheeuri Ghee Industry Ltd., & Chandeswory Textile Ltd. In his study, especially he
focused on the liquidity turn over & profitability position of those enterprises. In this analysis, he
found that four public enterprises have maintained adequate liquidity position, two public
enterprises have excessive & other remaining four public enterprises failed to maintain desirable
liquidity position. He had also found that out of ten public enterprises, only four were settling
some percentage of profit & remaining six public enterprises were operating in loss.

With the reference of his findings, he had brought certain policy issues such as lack suitable
financing planning, negligence of working capital management; deviation between liquidity &
turnover of assets & inability to shows the positive relationship between turnovers & returned on
net working capital. At the end, he has made some suggestive measures to overcome form the
above policy issues. These are identification of management information system, positive attitude
towards risk & profit & determination of right combination of short term & long terms sources of
funds to finance working capital needs.

K. Acharya (1985) has published an article on “Problems & Impediment in The Management of
Working Capital in Nepalese Enterprises”. This article has presented that working capital
management; especially in public sector, has been a relatively weak area. The study has described
operational problems as well as organizational problems faced by the Nepalese public enterprises
regarding the working capital management. Some of these problems are:
1. Public enterprises has slow inventory turnover.
2. Change in working capital has low impact on profitability.
3. Current liabilities are increasing largely than current assets.
4. They have not followed the conventional proportion of debt & equity as 1:1.
5. Absent & apathetic information management system.
6. The performance evolution tools & techniques like break-even analysis, fund flow analysis,
ratio analysis, are either undone or inefficient in most public enterprises.
7. Monitoring the proper functioning of working capital management has never considered as
managerial job.
8. Lack of regular evaluation of financial as well as regular internal & external audit system.
9. Most of public enterprises being unable to present their capital requirements with proper
justifications.
10. Functioning of finance department was not satisfactory.
11. Some of public enterprises are facing the problem of under utilization of capital.
This study is not satisfied with the performance of enterprises. To make an efficient use of funds
for minimizing the risk of loss. To make an efficient use of funds for minimizing the risk of loss
to attain the profit objectives.

L. D. Mahat (2004) has published article relating to “Spontaneous Resources Working Capital
Management”. The article has defined the three major sources of working capital i.e. equity
financing, debt financing & Spontaneous sources of financing, regarding the working capital
management. Debt financing includes short term, bank financing such as bank overdraft, cash
credit, bills purchase & discounting, letter of credit etc. whereas spontaneous sources of working
capital include trade credit, provisions & accursed expenses.

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 & 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 & 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 & 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 & checks their financial stability to face &
stand in forthcoming competitive day.

2.14 REVIEW OF PREVIOUS THESIS WORKS

Prior to the thesis besides the review of journals, articles & books & other research materials
various researchers have carried out several thesis works on the related topic, some of them are
relevant for these study propose which has been presented below.

Mr. Basudev Shrestha (2001) had conducted a research on “A Working Capital Management of
DDC”. The objectives of his study were to present overall picture of DDC & to analyze the
current assets & current liabilities of corporation & their impact & relationship to each other. In
his study, he had used the secondary data.

Major Findings of the study are:

1. The DDC followed the conservative working capital policy & its investment in working
capital has been increasing trend.
2. The investment in current assets was lower with respect to net fixed assets during the study
period the DDC has no clear vision about the investment in current assets.
3. The major components of current assets i.e. cash, inventories & receivables are in fluctuating
Trend. The Company does not follow credit sales policy.
4. The company has been able to maintain its current ratio in an average 1.78:1 during the study
period, which was also a satisfactory level.
5. The company bears the heavy loss during the study period.
6. The overall return position of DDC was negative, not in favourable condition. It is because of
inefficient utilization of current assets, total assets, & shareholders wealth.

Bishnu Prasad Aryal (2002) has done a research on “A Study on Working Capital Management
of NTC”. The specific objectives of this study are to know how far NTC was able to utilize its
current assets properly. This study has calculated various financial ratios by taking five years
secondary data of NTC.

Major Findings of the study are:

1. There was high liquidity in NTC.
2. Cash & bank balance holds large amount of current assets
3. It has followed conservative financing policy.
4. Turnover ratios of company are not satisfied, profitability position is not satisfied, but
liquidity condition of NTC is favourable.
Purushottam Gautam (2004) has conducted the research on “Working Capital Management of
Soaltee Crown Plaza”. This study has covered the period of five years. For the analysis of
working capital study different financial & statistical tools like ratio analysis, trend analysis, etc,
has been used. The main objective of this study is to examine working capital practices &
profitability position of Soaltee Crown Plaza.

Major Findings of the study are:

1. The current ratio of Soaltee Crown Plaza was in very poor condition because the current asset
was than the current liabilities in each year of the study period.
2. Comparing with standard ratio the calculated current ratio become too small. Therefore, the
liquidity position of the company was not satisfactory. Quick assets are pure liquid in nature,
but the calculated ratio shows the liquid is insufficient to pay its current payable as its ratio is
below standard.
3. Company is losing its ability in respect with investment policy because in the preceding year it
has positive return whereas in the later year it has negative return.
4. The fluctuation cash turnover implies that the Soaltee Crown Plaza is in efficient in cash
management.
5. The proportion of current assets to total assets was nearly consistent. The company has low
investment in current assets.
6. Company has followed conservative policy of financing. The receivable turnover was more
consistent. The utilization of current assets becomes unsatisfactory. The study has suggested
7. That the company should make the effective plan, which helps for immediate marketability &
certainly decrease the problem of overstocking.

Prabin Kunwar (2005) has carried out a research on “Working Capital Management of
Pharmaceutical Industry of Nepal with Reference to Royal Drugs Limited.” The study has used
statistical as well as financial tools to analyze the statement of past 5 year. The main objective of
this study is to analyze empirical testing affecting working capital of Royal Drugs Limited as well
as to know whether adequacy of working capital depends upon the nature of financing current
assets or not.

The Major Findings of this study are:

1. It has used more long-term sources of financing than short-term sources and followed
conservative working capital policy.
2. The major components of current assets in Royal Drugs Limited are cash and bank balance,
receivable, inventory. Among these current assets inventory holds largest portion of current
assets.
3. Company cannot efficiency utilize current assets and there is inefficient management of
receivable policy.
4. Liquidity position is satisfactory whereas return position is not satisfactory due to negative
return. This study has suggested that the company should determine appropriate financing
sources. Company should reduce inventory and receivable level for adjusting with sales and
production level. To balance them company should improve marketing and credit policy.

Asmita Tuladhar (2007) had undertaken a study entitled “A Comparative Study of Working
Capital Management of NABIL & SCBNL”. The objectives of the study were to study the current
assets & current liabilities & their impact on liquidity & profitability. To analyze the liquidity,
assets utilization, long -term solvency & profitability position of those two banks. She had
analyzed five years published data of selected banks & mostly used statistical & financial tools to
analyze them in order to achieve the set objectives.

Major Findings of the study are:

1. NABIL & SCBNL had maintained current Ratio of 1.55 & 1.31 respectively.
2. The average quick ratio of NABIL & SCBNL was 0.64 & 0.75 respectively. Liquidity of
SCBNL was always better than NABIL during the study period.
3. SCBNL had more short term & less costly resources of fund than NABIL.
4. NABIL had better investment efficiency on loans & Advances.
5. Both banks follow conservative working capital policy.
6. Profitability position of SCBNL is better than NABIL.

Acharya (2011) has carried out research “Working Capital Management of Manufacturing
Companies Listed in NEPSE.” The objectives of this study were to analyze the current assets &
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 of the study are:

1. It was found out that the companies are accompanied with various hindrances like lower
turnover, lower return, lower net working capital, or poor liquidity position.
2. There is lack of proper working capital policy, deteriorating financing situation, lack of
appropriate credit & collection policy.

Mainali (2012) has done a research work on “Working Capital Management of Bank of
Kathmandu Limited”.

Main Objectives:
1. To indicate liquidity position in current assets of Bank of Kathmandu limited over the year.
2. To point out the position of current liabilities & assets of Bank of Kathmandu limited over the
year.
3. To analyze the need to control investment in working capital in Bank of Kathmandu limited.
4. To make suggestion about removing any obstacle in making decision regarding management
of working capital & to point out alternating solution for maximizing the profit.

Major Findings of the study are:

1. The working capital of Bank of Kathmandu is positive. The working capital shows the
liquidity position of the organization. It means higher the working capital higher the liquidity
of the firm & vice versa. The working capital level of the bank is not constant.
2. The current ratio of the Bank of Kathmandu is not fluctuating over the year. The highest
current ratio is 1.07 in the fiscal year 062/63 & lowest current ratio is 1.05 in the fiscal year
059/60. The average current ratio of Bank of Kathmandu Ltd. is 1.06. In this case, the bank
has enough idle money, which cannot generate inflow to the bank
3. The Liquidity Ratio in Cash & Bank Balance position with respect to current assets of Bank of
Kathmandu is in moderate condition, which indicates the idle amount is not good for the
profit-oriented organisation. Similarly, the Cash & Bank Balance position to total deposits is
not satisfactory level over the study period. The saving Deposits to Total Deposits Ratio are in
satisfactory level.
4. The Activity ratios of Loans & Advances to Saving Deposits & Loans & Advances to Fixed
Deposits in mobilisation of the funds in Bank of Kathmandu is satisfactory over the five
fiscal years where as the Loans & Advances to Total Deposits in mobilisation of the funds in
Bank of Kathmandu is not satisfactory.
5. The Profitability Ratios of Interest Earned to Total Assets of the Bank of Kathmandu is not
satisfactory because it implies that the bank might not be able to use its total assets of funds to
earned interest. Similarly, the profitability Ratio of ROA Ratio is not satisfactory because
 Bank of Kathmandu could not able to utilize its total assets to generate profit. The ROE Ratio
is in satisfactory which indicated how well the firm has used the resource of the owners. This
ratio helps to maximize the shareholders welfare & financial performance of the bank.
6. The Net Profit to Total Deposits is helps to find out whether the bank could able to mobilize
its funds from outsiders properly or not. Since Bank of Kathmandu could not able to mobilize
its deposit or outsiders funds efficiently. Therefore, the bank should mobilize its deposits
properly to in order to increase profit.
7. The Capital Structure or Leverage Ratios in Long Term Debt to Net worth Ratio of Bank of
Kathmandu is in satisfactory condition. This implies that the proportion of outsiders claim in
total capitalization is higher in Bank of Kathmandu. Similarly the net fixed assets covers very
low portion of long-term debt. In other words, large portion of long-term debt is used in
current assets of the bank.
8. The coefficient of correlation between investment on government securities & total deposit is
0.69, which is insignificant, the coefficient of correlation between loan & advance & total
deposit stands at 0.98, which is significant or perfectly correlated, the coefficient of
correlation between cash & bank balance & current liabilities of Bank of Kathmandu is 0.80,
which is highly significant & the coefficient of correlation between loan & advance & net
profit is 0.99. This is highly significant.

Dahal (2013) has done a research on “A Case Study of a Working Capital & its Impact” with
reference to NIC & NABIL Bank.

Main Objectives:
1. To analyze the liquidity, assets utilization, long-term solvency & profitability position of
Banks.
2. To study the current assets & current liabilities & their impact on liquidity & profitability.
3. To provide appropriate recommendation & suggestion for the improvement of the working
capital management
4. To enhance the profitability scenario of Nepalese commercial banks.

Major Findings of the study are:

1. The average cash & bank balance percentage & loans & advances percentage are higher in
NIC than NABIL. However, the average government securities percentage is higher in
NABIL than NIC.
2. The liquidity position of NIC is better than NABIL. The trend of Liquidity ratio i.e. quick
ratio & cash & 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.
3. 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 &
advances more effectively than NABIL.
4. Profitability measures the efficiency of the firm. The profitability position of NABIL is far
better than NIC although the interest earned by NABIL & NIC is equal.
5. The average long-term debt to net worth ratio of NABIL is higher than that of NIC. Therefore,
NABIL has higher proportion of outsiders claim in total capitalization than NIC or NABIL
has more risky & aggressive capital structure than NIC.
6. Correlation between cash & bank balance & current liabilities in NABIL bank is positive
which shows the positive relationship between two variables. On the other hand, coefficient of
correlation between cash & 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 & net profit in both banks.
7. The mean value of current ratio & quick ratio of NABIL are statistically different from NIC.
However, the cash & bank balance to deposit ratio are not significantly different.
8. The mean value of interest earned to total assets ratio is not significantly different, but net
profit to total assets & net profit to total deposit are significantly different of NABIL & NIC.

Dhungana (2014) has carried out research “A Study on Working Capital Management of selected
Joint Venture Banks in Nepal”

Main Objectives:
1. To study the position of current Assets & current liabilities of NABIL, NIBL & SCBNL, &
their impact on Liquidity.
2. To analyze the composition of working capital & liquidity utilization of NABIL, NIBL &
SCBNL.
3. To analyze the composition of working capital & assets utilization of NABIL, NIBL &
SCBNL.
4. To analyze the comparative study of working capital Management among NABIL, NIBL &
SCBNL.
5. Based on the analysis, to provide recommendations & suggestions for the improvement of
working capital management of NABIL, NIBL & SCBNL in the future.

Major Findings of the study are:

1. The average major components of the current assets i.e. cash & bank balance, loan, & advance
are higher in NIBL, money at call or short notice, government securities, & miscellaneous
assts are higher at SCBNL.
2. The liquidity position of sample banks are analyzed with the CR & QR has highest CR &
SCBNL has highest QR.
3. Correlation between government securities & total deposit of sample banks are not significant;
it shows that there is not close relationship between two variables. However, there is highly
significant correlation between loan & advance & total deposit of NABIL, NIBL & SCBNL.
The banks have better utilization of their loan & advance & total deposit. There is positive
correlation between cash & bank & current liabilities & highly significant in NABIL, NIBL &
SCBNL. Therefore, the banks have been better utilization of their cash & bank balance &
current liabilities.
4. The composition of working capital are cash & bank balance, money at call or short notice,
loan & advance, government securities & miscellaneous current assets are significantly
different. There is significant difference in composition of working capital among NABIL,
NIBL & SCBNL. Since, the mean value of loan & advance on total current assets of sample
banks are significantly high & invest their fund in income generating sector.
5. The liquidity position of the sample banks’ CR is not significantly different. However, QR is
significantly different in liquidity position of NABIL, NIBL & SCBNL. The mean value of
CR of NIBL is higher than NABIL & SCBNL but QR of SCBNL is higher, however, liquidity
position of SCBNL is better.

Joshi (2014) has done a research work on “Working Capital Management of Commercial Banks
in Nepal” (With Special Reference to NIBL, HBL, EBL & NABIL)

Main Objectives:
1. To evaluate the working capital financing policy adopted by the banks.
2. To analyze the liquidity maintenance & the efficiency in equity management to generate profit
of the banks.
3. To show the relationship of net profit with the working capital, & debt of the banks.
4. To provide appropriate suggestions.

Major Findings of the study are:

1. The debt capital representation is extensively higher than the equity capital in all the selected
banks, & thus represents much risk in total assets of the bank. In addition, it can be considered
that the total assets of HBL & NABIL are much riskier than that of NIBL & NABIL, since the
debt capital representation in EBL & NABIL is higher.
2. 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 & 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.
3. 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. 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.
5. 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 & 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.
6. Based on working capital to total assets, it can be concluded that NIBL has high liquidity,
since the ratio is highest in NIBL, & HBL has low liquidity. However, all the banks differ in
not important in the ratio.
7. 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 conclude that NIBL is quite
success in managing working capital to have sound liquidity position.
8. 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 & equity capital
decreases, the working capital is said to be aggressive. However, in other bank there is no
such strong inverse relationship. Although, it cannot be ignored that, the remaining banks are
also following aggressive working capital policy.
9. The net profit has positive relationship with net working capital & 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 was statistically
insignificant in NABIL.

Pandey (2014) has done a research on working capital management of hotel industry of Nepal
using the financial statements of three sample hotels for the past five years under the heading
“Working Capital Management in Hotel Industry (With Reference To Hotel Radisson, Hotel
Soaltee & Hotel Hyatt)”.The objectives of the study were to analyze the composition of working
capital, liquidity position, & profitability position. To evaluate the relationship between sales &
different variables of working capital & to examine the working capital cash flow cycle & cash
conversion cycle of the hotels.

Major Findings of the study are:

1. It was found that all three companies have been following aggressive financing policy.
2. They have negative working capital during the study period; none of the hotels seem to have
solid view of the management of working capital.
3. Hotel Hyatt has very poor liquidity position as compared to other hotel turnover of the entire
hotels was decreasing due to unstable political situation for more than a decade.
4. Sales revenue was decreasing but operating expenses was in increasing trend accounting for
the loss to the hotels.
5. Hotel Radisson & Hotel Hyatt have been paying high amount of interest expenses than Hotel
Soaltee.

Pathak (2014) has done a research work on “Working Capital Management of Commercial banks
in Nepal “a comparative study of EBL & NBBL.

Main Objectives:
1. To study the working capital Management of EBL & NBBL.
2. To study the position of current assets & current liabilities & their impact.
3. To examine the liquidity & profitability position of EBL & NBBL.
4. Based on the analysis to provide recommendation & suggestion for the improvement of the
working capital management of EBL & NBBL.

Major Findings of the study are:

1. 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.
2. There is very high variability of net working capital maintained by NBBL & EBL.
3. In case of EBL fluctuation of the study period, this shows that EBL is more efficiency than
NBBL.
4. The profitability position of NBBL is better than EBL.
5. Correlation between investment on government security & total deposit of EBL is highly
significant. It shows that there is close relationship between investment on government
securities & total deposit of EBL. However, it is not significant in case of NBBL.
6. While testing the hypothesis of composition of working capital, it has been observed that the
mean value of proportion of cash & bank balance, loan & advance & government securities of
NBBL & EBL are not statistically different.
7. While testing the hypothesis of liquidity management it has been observed that the mean value
of CR, QR, & cash & bank balance to deposit ratio of NBBL & EBL are not significantly
different. It shows that liquidity management policy of these banks is significantly difference.
8. 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 & interest on to total assets of NBBL is not
statistically different from that of EBL.

2.15 RESEARCH GAP

All the above research studies are conducted with the title ‘Working Capital’. Some of the
researcher has done research on manufacturing companies, some of them have done research on
hotels & restaurants, some of them have done research on telecommunication companies & rest of
them have done the research on banking & financial institutions. This study has selected two joint
ventures bank SCBNL & HBL for the analysis of working capital management & fulfillment of
the objective of the study in the working capital management The research have covered the data
form FY 2009/10 to 2013/14 where as the previous research work had covered the data up to
2012/13. In this study the researcher has carried out the distinct from the previous thesis research
work in term of sample size nature of sample banks methodology financial & statically tools that
are been used. Analysis of statically tools such as mean, standard deviation, coefficient of
variation, correlation coefficient, & trend line analysis are used as the model of the study with the
view to obtain the relevant & accurate results.

CHAPTER 3
RESEARCH METHODOLOGY

3.1 INTRODUCTION

Research methodology means the analysis of specific topic by using proper method. The research
methodology tries to make a clear view of the method & process adopted in the entire aspect of
the study. It is also considered as the path from which researcher can systematically solve the
research problem. In this chapter, efforts have been made to present & explain the specific
research design to attain the research objective. It describes the method & process applied in the
entire subject of the study. The study covers the quantities methodology using financial &
statistical tools. It is based on secondary data only. Thus, this chapter focuses on research design,
population, & sample, sources of data, data processing & analysis & tools & techniques of
analysis.

3.2 RESEARCH DESIGN

Selection of appropriate research design is necessary to meet the study objectives of any research
“Research design is plan for collecting & analyzing evidence that will make it possible for the
investigator to answer whatever question he or she has posed the design of an investigator touches
almost all aspect of the research form the minute details of data collection to the selection of the
techniques of data analysis.
(Ragin, 1994 p.191)

The study aims to represent the accurate on the working capital & its impact on overall financial
position of the selected banks. It is based on recent 5 years data form F/Y 2009/10 to 2013/14.
The study has been conducted to assess the current situation of the working capital management
of the commercial banks & describe the situation & event occurring at the present context.

In this study descriptive & analytical survey is done. The justification for the choice of these
methods can be various types. The descriptive method is preferred because it includes reliable
data & information covering a long time & avoids several complex variables operating into
formulation & adoption of credit & investment policies.

3.3 POPULATION & SAMPLE

In the present context there are 30 A class commercial banks operating in Nepal. Among them
SCBNL & HBL have been taken as a sample for the study. This sample banks are the pioneer
leading bank in the context of deposits collection & loan payment. The financial statements of the
5 fiscal years from F/Y 2009/10 (2066/67) to 2013/14 (2070/71) have been taken as sample data
for evaluating working capital management.

3.4 NATURE & SOURCES OF DATA

This study is conducted based on secondary data relating to working capital management. The
secondary data have been extracted from the annual report of the selected banks. Beside these, the
annual report of NRB has been equally reviewed. Further, the directives issued by the NRB also
have been taken as the sources of secondary data. Similarly, various data & information have
been collected from periodicals, managerial & economics magazine, journals etc.

3.5 DATA PROCESSING PROCEDURE & ANALYSIS

The data collected from various sources were in the raw form. The method of analysis were
classified & tabulated as per the nature of study & in accordance of the data. Different financial &
statistical tools for data analysis were used. The obtained data analysis is present in various tables,
charts & diagram with the help of supporting interpretation.

3.6 TOOLS & TECHNIQUES OF ANALYSIS

Under this study, financial as well as statistical tools have been use to analysis the data &
information, which were collected.

3.6.1 FINANCIAL TOOLS

In this research study various financial tools are been used for analyzing the data. The focus will
be on ratio analysis. Ratio analysis is the most important tools of financial analysis, which helps
to ascertain the financial condition of the organisation. Various ratios are used & grouped for the
analysis of liquidity position, capital structure position & profitability position of the banks.

Ratio analyses are the most common widespread tools used to analyze a business. They help to
compare different organization in different industries. Since a ratio is simply a mathematically
comparison based on proportions of different organization it can be use to compare the financial
position & performance of the different organization & it identifies their strengths & weaknesses.
These ratios are often divided up into 6 main categories: liquidity, solvency, efficiency,
profitability, market prospect, investment leverage & coverage.

A. Liquidity Ratio
Liquidity ratios analyze the ability of a company to pay off both its current liabilities as they
become due as well as their long-term liabilities as they become current. In other words, these
ratios show the cash levels of a company & the ability to turn other assets into cash to pay off
liabilities & other current obligations. Liquidity ratio not only measures of how much cash a
business has. It is also a measure of how easy it will be for the company to raise enough cash or
convert assets into cash. Assets like accounts receivable, trading securities, & inventory are
relatively easy for many companies to convert into cash in the short term. The following are the
liquidity ratio.

1. Working Capital to Total Assets

The Working Capital to Total Assets ratio measures a company’s ability to cover its short term
financial obligations or Total Current Liabilities by comparing its Total Current Assets to its Total
Assets as to the liquidity of the company this ratio can uncover the percentage of remaining net
current assets compared to the company’s Total Assets. This ratio measures the relationship
between the working capital & total assets of the bank. This ratio is relevant to the management
for making policy in the types of finance to be adopted. This ratio is expressed as

Working Capital to Total Assets = Working Capital

Total Assets

2. Current Ratio:

The current ratio is a liquidity ratio that measures a firm's ability to pay off its short-term
liabilities with its current assets. The current ratio is an important measure of liquidity because
short-term liabilities are due within the next year. The current ratio helps investors & creditors
understand the liquidity of a company & how easily that company will be able to pay off its
current liabilities. This ratio expresses a firm's current liability in terms of current assets. This
ratio is expressed as:

Current Ratio = Total Current Assets

Total Current Liabilities
3. Quick Ratio:

The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to pay
its current liabilities when they come due with only quick assets. Quick assets are current assets
that can be converted to cash within the short-term. Cash, & equivalents, short-term investments
or marketable securities, and current accounts receivable are considered quick assets. Short-term
investments or marketable securities include trading securities and available for sale securities
that can easily be converted into cash within the next 90 days. Marketable securities are traded on
an open market with a known price and readily available buyers. Any stock on the NEPSE would
be considered marketable securities because they can easily be sold to any investor when the market
is open. The acid test of finance shows how well a company can quickly convert its assets into
cash in order to pay off its current liabilities. It also shows the level of quick assets to current
liabilities. This ratio is expressed as:

Quick Ratio = Total Quick Assets

Total Current Liabilities

4. Cash Ratio:

The cash ratio or cash coverage ratio is a liquidity ratio that measures a firm's ability to pay off its
current liabilities with only cash & cash equivalents. The cash ratio is much more restrictive than
the current ratio or quick ratio because no other current assets can be used to pay off current debt
only cash. This is why many creditors look at the cash ratio. They want to see if a company
maintains adequate cash balances to pay off all of their current debts as they come due. Since
inventory take months or years to sell & receivables could take weeks to collect. Cash is
guaranteed to be available for creditors. This ratio is expressed as

Cash Ratio = Total Cash Balance

Total Current Liabilities

B. Capital Structure

Capital Structure ratios, sometimes called equity or debt ratios, measure the value of equity in a
company by analyzing its overall debt picture. These ratios compare either debt or equity to assets
as well as shares outstanding to measure the true value of the equity in a business. This shows
how much of the company assets belong to the shareholders rather than creditors. When
shareholders own a majority of the assets, the company is said to be less leveraged. When
creditors own a majority of the assets, the company is considered highly leveraged. All of these
measurements are important for investors to understand how risky the capital structure of a
company & if it is worth investing in. Following are under leverage ratios.
5. Debt Ratio:

Debt ratio is a solvency ratio that measures a firm's total liabilities as a percentage of its total
assets. The ratio shows how company's ability to pay off its liabilities with its assets. This ratio
measures the financial leverage of a company. Companies with higher levels of liabilities
compared with assets are considered highly leveraged & more risky for lenders. This helps
investors & creditors analysis the overall debt burden on the company as well as the firm's ability
to pay off the debt in future, uncertain economic times. This ratio is expressed as:

Debt Ratio = Total Debt

Total Assets

6. Debt Equity Ratio:

The debt to equity ratio is a financial ratio that compares a company's total debt to total equity.
The debt to equity ratio shows the percentage of company financing that comes from creditors &
investors. A higher debt to equity ratio indicates that more debt financing (bank loans) is used
than equity financing (shareholders). This ratio is expressed as:

Debt-Equity Ratio = Total Debt

Total Equity

7. Equity Ratio:

The equity ratio is an investment solvency ratio that measures the amount of assets that are
financed by owners' investments by comparing the total equity in the company to the total assets.
The equity ratio highlights two important financial concepts of a solvent & sustainable business.
The first component shows how much of the total company assets are owned outright by the
investors. The second component inversely shows how leveraged the company is with debt. The
equity ratio measures how much of a firm's assets were financed by investors. This ratio is
expressed as:
 Equity Ratio = Total Equity
Total Assets

C. Profitability Ratio

Profitability ratios show a company's overall efficiency and performance. The profitability ratios
are based on two types: margins & returns. Ratios that show margins represent the firm's ability to
translate sales Rs. into profits at various stages of measurement. Ratios that show returns
represent the firm's ability to measure the overall efficiency of the firm in generating returns for
its shareholders. Some of the profitability ratios based on return are as follows:

8. Return on Asset:

Return on Assets, or return on total assets, is a profitability ratio that measures the net income
produced by total assets during a period by comparing net income to the average total assets. The
return on assets ratio measures how effectively a company can earn a return on its investment in
assets. It is expressed as:

Return on Assets = Net Profit after Tax x 100

Total Assets

9. Return on Equity:

Return on Equity is a profitability ratio that measures the ability of a firm to generate profits from
its shareholders investments in the company. ROE is also an indicator of how effective
management is at using equity financing to fund operations & grow the company. It is expressed
as:

Return on Equity = Net Profit after Tax x 100

Total Equity

3.6.2 STATISTICAL TOOLS

Statistical tools are essential to measure the relationship between two or more variables. It is a
mathematical technique use for analyzing & interpreting the working capital management of the
commercial banks. It helps in presentation of data, shows the relation & deviation between
different types of variables in the banks. In this study arithmetic mean, standard deviation, C.V.
(%), Trend analysis, correlation & regression analysis, hypothesis etc are used to analysis in
working capital management. 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 & the smallest items. It is obtained by
dividing the sum of the quantities by the number of items. Therefore, it is calculated as

x=
∑X
N
Where,
x= A rithmetic Mean∨Average
∑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 & 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 & their arithmetic mean. Generally, it is denoted by σ (read as sigma). Therefore, it is
calculated as:
∑( x−x)²
σ=
√
Where,
N −1

σ =Standard Deviation
N = Number of items in the series.
X = Average∨Arit h metic 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. The CV is the
relative measure of dispersion, comparable across distribution. It is denoted by dividing the
arithmetic mean to standard deviation.

σ
C . V .= x 100
X
Where,
CV =Coefficient of Variation
σ =Standard Deviation
X =Average ∨Arit h metic Mean

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 & 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 variables are related to what extent variations in one
go with the variations in the other. The value of coefficient of correlation always lie between +1
& -1 indicating -1 as perfect negative relationship,+1 as perfect positive relationship, & of 0 as no
relationship between the variables. It is defined by Karl Pearson as:

N ∑ XY −∑ X ∑Y
r= 2 2
√ N ∑ X −( ∑ X ) x √ N ∑ Y ²−(∑Y )²

e. Probable Error

The probable error denoted by P.E. is used to measure the reliability & test of significance of
correlation coefficient. Significance of relationship has been tested by using the probable error
(P.E.) & the following model denotes it:
 1−r 2
P . E .=0.6745 x ∨0.6745 x S . E .
√N

Where,
1−r 2
S . E .=
√N
S.E. = Standard error of correlation coefficient
r = correlation coefficient
N = number of pairs of observations
If r < PE the value of ‘r’ is not significant no matter how high the value of r is
If r > 6 PE the value of ‘r’ is significant
If r = PE the value of ‘r’ is no correlated

f. Regression Analysis & Trend Analysis:

Regression is a statistical tool, which is used to determine the statistical relationship between two
variables & to make the estimation or prediction of one variable on the basis of another variable.
Therefore, regression helps to estimate the value of one variable from the given value of another.
This analysis also helps to describe the average mathematical relationship between two variables
known as simple linear regression analysis. It’s “Simple” because there is only one independent
variable & “Linear” because the relationship between the independent & dependent variables is
assumed linear.
Trend analysis is one the most important methods, which enables to find out the actual position of
business cycle over a period of years. The study of the data over a long period enables us to have
a general idea about the pattern of the behaviour of the trend under consideration this help in
business forecasting and planning future operation. The trend analysis also enables us to compare
two or more time series over different periods & draw important conclusion about them. In this
study, the researcher has use least square method for analysing trend analysis. It is computed as
follows:

Y = a + bX

Where,
Y = Value of dependent variable
a = Intercept of trend line
b = Slope of trend line
X = Value of the independent variable
Following two equations can be developed putting the above values in normal equation
∑Y = Na + b∑X
∑XY= a∑X+ b∑X2

Where,
∑ Y −b ∑ X
a=
N

N ∑ XY −∑ X ∑Y
b=
N ∑ X ²−(∑ X ) ²

CHAPTER 4
PRESENTATION & ANALYSIS OF DATA

4.1 Introduction

The data collected from the various sources have been presented & analyzed in this chapter. Since
the conclusions to be drawn & the recommendations to be made from this study, the presentation
& interpretation of data analyzed here. This chapter constitutes the main part of this study. The
entire figures presented in million. The data presented here are concerned to mid July of each year
& the data presented here are based on the amount mentioned in the annual report of respective
years of concerned banks & journals of NRB.
4.1.1 Working Capital to Total Assets:

This ratio measures the relationship between the working capital & total assets of the bank. This
ratio is relevant to the management for making working capital policy in the finance that is to be
adopted. Working capital to total assets ratio usually has positive value, showing the company’s
liquidity is improving. A low ratio indicates the company have more current liabilities compare to
current assets, reducing the amount of working capital. The following table & figures shows the
net working capital to total assets ratio of SCBNL & HBL.

Table 4.1
Working Capital to Total Assets

(Amount in millions)
SCBNL HBL
F/Y F/Y
WC TA Ratio WC TA Ratio
2009/10 3251.17 40213.32 8 2009/10 2877.33 42717.12 6.73
2010/11 3921.71 43810.52 8.95 2010/11 3317.99 46736.2 7.1
2011/12 4032.54 41677.05 9.68 2011/12 3826.64 54364.43 7.04
2012/13 4536.05 45631.1 9.95 2012/13 5179.36 61152.97 8.47
2013/14 5019.37 53324.1 9.42 2013/14 5860.6 73589.84 7.96
Mean 0 Mean 0
S.D. 0.77 S.D. 0.73
** CV **
Expres Expres
CV sion is sion is
faulty faulty
** **
(Source: Appendices)

Figure 4.1
Working Capital to Total Assets
 12.00

10.00

8.00

6.00 SCBNL
HBL

4.00

2.00

0.00
2009/10 2010/11 2011/12 2012/13 2013/14

In the above table, the working capital to total capital of both SCBNL & HBL has been in
fluctuating trend. In the F/Y 2009/10, the ratio of working capital to total assets of SCBNL &
HBL is 8.00% & 6.73% respectively, which is lowest Ratio. Similar, in the F/Y 2012/13 the ratio
of working capital to total assets of SCBNL & HBL is 9.95 % & 8.47 % respectively, which is the
highest ratio.

From the view point of mean the working capital to total assets of SCBNL has higher mean (i.e.
9.20) compare to HBL (i.e. 7.46) considering the mean ratio of SCBNL is found better liquidity
ratio position than that of HBL.

From the view point of S.D. SCBNL has higher S.D. of (i.e. 0.77) compare to HBL with S.D. of
(i.e. 0.73). It signifies that SCBNL has high fluctuation with respect to working capital to total
assets. Similar, HBL has low fluctuation with respect to working capital to total assets.

From the view point of CV HBL has higher CV of (i.e. 9.79 %) compare to SCBNL with CV of
(i.e. 8.37 %). it signifies that HBL is in consistent with respect to working capital to total assets.
Similar, SCBNL is consistent with respect to working capital to total assets during the entire study
period.
4.1.2 Current Ratio:
The current ratio is a liquidity ratio that measures a firm's ability to pay off its short-term
liabilities with its current assets. The current ratio is an important measure of liquidity because
short-term liabilities are due within the next year.

Current assets such as cash & cash equivalents & marketable securities can easily be converted
into cash in the short term. This means that companies with larger amounts of current assets will
more easily be able to pay off current liabilities when they become due without having to sell off
long-term, revenue generating the assets & the current Ratio helps the investors & creditors to
understand the liquidity of a company how easily that company will be able to pay off its current
liabilities.

If a company has to sell of fixed assets to pay for its current liabilities, this usually means the
company is not making enough from operations to support activities. In other words, the company
is losing money. Sometimes this is the result of poor collections of accounts receivable. A higher
current ratio is always more favourable than a lower current ratio because it shows the company
can easily pay its current debt. The following table & figures shows the current ratio of SCBNL &
HBL

Table 4.2
Current Ratio

(Amount in millions)
SCBNL HBL
F/Y F/Y
CA CL Ratio CA CL Ratio
2009/1
2009/10 40094.78 36843.61 1.09 41655.25 38777.92 1.07
0
2010/1
2010/11 43704.45 39782.74 1.1 45548.71 42230.72 1.07
1
2011/1
2011/12 41587.42 37554.88 1.1 53059.06 49232.42 1.08
2
2012/1
2012/13 45549.58 41013.53 1.11 59844.19 54664.83 1.09
3
2013/1
2013/14 53255.38 48236.01 1.1 72267.03 66406.43 1.09
4
Mean 0 Mean 0
S.D. 0.01 S.D. 0.01
** CV **
Express Expres
CV ion is sion is
faulty faulty
** **
(Source: Appendices)
 Figure 4.2
Current Ratio

1.12

1.11

1.10

1.09
SCBNL
1.08 HBL

1.07

1.06

1.05
2009/10 2010/11 2011/12 2012/13 2013/14

In the above table the current ratio of SCBNL & HBL are below the normal standard ratio 2:1.
The current ratio of SCBNL has been in fluctuating trend. In the F/Y 2009/10, the current ratio of
SCBNL is 1.09, which is lowest ratio. In the F/Y 2012/13, the current ratio of SCBNL is 1.11,
which is the highest ratio. Similar, the current Ratio of HBL has been in increasing trend. In the
F/Y 2009/10, the current ratio of HBL is 1.07, which is lowest ratio. In the F/Y 2012/13 &
2013/14 the current ratio of HBL is 1.09, which is the highest ratio.

From the viewpoint of mean the current ratio of SCBNL has, higher Mean (i.e. 1.10) compare to
HBL (i.e. 1.08) considering the mean ratio of SCBNL is found better liquidity ratio position than
that of HBL

From the view point of S.D. (S.D.) SCBNL has equal S.D. of (i.e. 0.01) compare to HBL with
S.D. of (i.e. 0.01). It signifies that both banks have equal fluctuation with respect to current ratio.
From the view point of CV HBL has higher CV of (i.e. 0.93 %) compare to SCBNL with CV of
(i.e. 0.91 %). it signifies that HBL is in consistent with respect to current ratio. similar, SCBNL is
consistent with respect to current ratio during the entire study period.

4.1.3 Quick Ratio:

The quick ratio is a liquidity ratio that measures the ability of a company to pay its current
liabilities when they come due with only quick assets. Quick assets (Current Assets – Stock -
Prepayments) are such type of assets that can be converted to cash within 90 days or in the short-
term.

Cash, & cash equivalents, short-term investments or marketable securities & accounts receivable
are considered quick assets. Short-term investments or marketable securities include trading
securities and available for sale securities that can easily be converted into cash within the next 90
days.

The acid test ratio measures the liquidity of a company by showing its ability to pay off its current
liabilities with quick assets. If a firm has enough quick assets to cover its total current liabilities,
the firm will be able to pay off its obligations without having to sell off any long-term or assets.
Higher quick ratios are more favourable for companies because it shows there are more quick
assets than current. The following table & figures shows the quick ratio of SCBNL & HBL

Table 4.3
Quick Ratio

(Amount in millions)
SCBNL HBL
F/Y F/Y
QA CL Ratio QA CL Ratio
2009/1
2009/10 40072.93 36843.61 1.09 41598.78 38777.92 1.07
0
2010/1
2010/11 43679.13 39782.74 1.1 45485.46 42230.72 1.08
1
2011/1
2011/12 41562.18 37554.88 1.1 52994.81 49232.42 1.07
2
2012/1
2012/13 45529.38 41013.53 1.11 59768.9 54664.83 1.09
3
2013/14 53232.56 48236.01 1.1 2013/1 72176.01 66406.43 1.09
 4
Mean 0 Mean 0
S.D. 0.01 S.D. 0.01
** CV
Expres **
CV sion is Expression
faulty is faulty **
**
(Source: Appendices)

Figure 4.3
Quick Ratio

1.12

1.11

1.10

1.09
SCBNL
1.08 HBL

1.07

1.06

1.05
2009/10 2010/11 2011/12 2012/13 2013/14

In the above table the quick ratio of SCBNL & HBL are below the normal standard ratio 2:1. The
quick ratio of SCBNL has been in fluctuating trend. In the F/Y 2009/10, the QR of SCBNL is
1.09, which is lowest ratio. In the F/Y 2012/13, the QR of SCBNL is 1.11, which is the highest
ratio. Similar, the QR of HBL has been in increasing trend. In the F/Y 2009/10, the QR of HBL is
1.07, which is lowest ratio. In the F/Y 2012/13 & 2013/14 the current ratio of HBL is 1.09, which
is the highest ratio.
From the viewpoint of mean the quick ratio of SCBNL has, higher mean (i.e. 1.10) compare to
HBL (i.e. 1.08) considering the mean ratio of SCBNL is found better liquidity ratio position than
that of HBL

From the view point of S.D. (S.D.) SCBNL has equal S.D. of (i.e. 0.01) compare to HBL with
S.D. of (i.e. 0.01). It signifies that both banks have equal fluctuation with respect to current ratio.

From the view point of CV HBL has higher CV of (i.e. 0.93 %) compare to SCBNL with CV of
(i.e. 0.91 %). it signifies that HBL is in consistent with respect to current ratio. similar, SCBNL is
consistent with respect to current ratio during the entire study period.

4.1.4 Cash Ratio:

The cash ratio or cash coverage ratio is a liquidity ratio that measures a firm's ability to pay off its
current liabilities with only cash & cash equivalents. The cash ratio is much more restrictive than
the current ratio or quick ratio because no other current assets can be used to pay off current debt
only cash. This is why many creditors look at the cash ratio.

Since inventory take months or years to sell & receivables could take weeks to collect. Cash is
guaranteed to be available for creditors. This ratio shows how well a company can pay off its
current liabilities with only cash & cash equivalents. This ratio shows cash & equivalents as a
percentage of current liabilities.

A ratio of 1 means that the company has the same amount of cash equivalents as it has current
debt. A ratio above 1 means that all the current liabilities can be paid with cash & equivalents. A
ratio below 1 means that the company needs more than just its cash reserves to pay off its current
debt. As with most liquidity ratios, a higher cash coverage ratio means that the company is liquid
and can more easily fund its debt. The following table & figures shows the cash ratio of SCBNL
& HBL.

Table 4.4
Cash Ratio

(Amount in millions)
F/Y SCBNL F/Y HBL
 CBB CL Ratio CBB CL Ratio
**
Expres
2009/10 1929.31 36843.61 0.05 2009/10 3866.49 38777.92 sion is
faulty
**
**
Expres
2010/11 2975.8 39782.74 0.07 2010/11 2964.65 42230.72 sion is
faulty
**
** **
Expressi Expres
2011/12 6366.23 37554.88 on is 2011/12 6362.3 49232.42 sion is
faulty faulty
** **
** **
Expressi Expres
2012/13 6405 41013.53 on is 2012/13 3648.2 54664.83 sion is
faulty faulty
** **
**
Expres
2013/14 9188.3 48236.01 0.2 2013/14 5542.59 66406.43 sion is
faulty
**
Mean 0 Mean 0
S.D. 0.07 S.D. 0.03
** CV **
Expressi Expres
CV on is sion is
faulty faulty
** **
(Source: Appendices)

Figure 4.4
 0.25

0.20

0.15

SCBNL
HBL
0.10

0.05

0.00
2009/10 2010/11 2011/12 2012/13 2013/14

Cash Ratio

In the above table, the cash ratio of SCBNL has been in increasing trend. In the F/Y 2009/10, the
current ratio of SCBNL is 0.05, which is lowest ratio. In the F/Y 2013/14, the current ratio of
SCBNL is 0.20, which is the highest ratio. Similar, the cash ratio of HBL has been in fluctuating
trend. In the F/Y 2010/11 & 2012 /13, the cash ratio of HBL is 0.07, which is lowest ratio. In the
F/Y 2011/12, the cash ratio of HBL is 0.13, which is the highest ratio.

From the view point of mean the cash ratio of SCBNL has higher mean (i.e. 0.13) compare to
HBL (i.e. 0.09) considering the mean ratio of SCBNL have the ability to pay off its current
liabilities with only cash & cash equivalents better than that of HBL.

From the view point of S.D. SCBNL has higher S.D. of (i.e. 0.07) compare to HBL with S.D. of
(i.e. 0.03). It signifies that SCBNL has high fluctuation with respect to cash ratio. Similar, HBL
has low fluctuation with respect to cash ratio.

From the view point of CV SCBNL has higher CV of (i.e. 53.85 %) compare to HBL with S.D. of
(i.e. 33.33 %). it signifies that SCBNL is in consistent with respect to cash Ratio. Similar, HBL is
consistent with respect to cash Ratio during the entire study period.

4.1.5 Debt Ratio:

Debt ratio is a solvency ratio measures firm's total debt as a percentage of its total assets. This
ratio shows how company is ability to pay off its debt to its assets. Firm with higher levels of debt
compared to its assets are more risky. A lower debt ratio implies more stable because firm with
lower ratio has lower overall debt. Each industry has its own standard for debt, but 0.50 is better
ratio. The following table & figures shows the debt ratio of SCBNL & HBL.

Table 4.5
Debt Ratio
(Amount in millions)
SCBNL HBL
F/Y F/Y
TD TA Ratio TD TA Ratio
**
Expres
2009/10 36843.61 40213.32 91.62 2009/10 39277.92 42717.12 sion is
faulty
**
2010/11 40132.74 43810.52 91.61 2010/11 42740.72 46736.2 91.45
2011/12 37554.88 41677.05 90.11 2011/12 49732.42 54364.43 91.48
2012/13 41013.53 45631.1 89.9 2012/13 55853.26 61152.97 91.34
2013/14 48236.01 53324.1 90.46 2013/14 67506.43 73589.84 91.73
Mean 0 Mean 0
S.D. 0.82 S.D. 0.24
** CV **
Express Expres
CV ion is sion is
faulty faulty
** **
(Source: Appendices)

Figure 4.5
Debt Ratio
 12.00

10.00

8.00

6.00 SCBNL
HBL

4.00

2.00

0.00
2009/10 2010/11 2011/12 2012/13 2013/14

In the above table the debt ratio of SCBNL & HBL are above the normal standard ratio 50% or
0.50. The debt ratio of SCBNL is in fluctuating trend. In F/Y 2009/10, the debt ratio of SCBNL is
91.62% & from the F/Y 2010/11 to 2012/13 the debt ratio decrease to 89.90% & again it has
increased to 90.46% in F/Y 2013/14. Therefore, SCBNL the use it is of debt is fluctuant. Similar,
the debt ratio of HBL is constant rate. Since the debt ratio of HBL is between 91% to 92%; there a
constant use of debt is at same rate but use of debt is higher than that of SCBNL. Although the
debt ratio is higher than standard ratio 0.50 or 50% in both case SCBNL has been using its debt
less compare to HBL & therefore SCBNL is less risky borrowing its debt compare to HBL.

from the view point of mean the debt ratio of HBL has higher mean (i.e. 91.59) compare to
SCBNL (i.e. 90.74) considering the mean ratio of HBL have use more of its debt financing
compare to equity financing.

From the view point of S.D. SCBNL has higher S.D. of (i.e. 0.82) compare to HBL with S.D. of
(i.e. 0.24). It signifies that SCBNL has high fluctuation with respect to debt Ratio. Similar, HBL
has low fluctuation with respect to debt ratio.

From the view point of CV SCBNL has higher CV of (i.e. 0.90 %) compare to HBL with S.D. of
(i.e. 0.26 %). it signifies that SCBNL is in consistent with respect to debt Ratio. similar, HBL is
consistent with respect to debt ratio during the entire study period.
4.1.6 Debt Equity Ratio:

The debt equity ratio is a financial ratio that compares a company's total debt to total equity. The
debt to equity ratio shows the percentage of company financing that comes from creditors &
investors. A higher debt to equity ratio indicates that more debt financing is used than equity
financing. A lower debt to equity ratio usually implies a more financially stable business.
Companies with a higher debt to equity ratio are considered more risky to creditors & investors
than companies with a lower ratio. Unlike equity financing, debt must be repaid to the lender.
Since debt financing also requires debt servicing or regular interest payments, debt financing can
more expensive than equity financing. Companies leveraging large amounts of debt might not be
able to make the payments. In the view of creditor’s debt equity ratio is risky because the
investors have not funded the operations as much as the creditors due to lack of performance of
the organization that means the organization is seeking towards debt financing. The following
table & figures shows the debt equity ratio of SCBNL & HBL.

Table 4.6
Debt Equity Ratio
(Amount in millions)
SCBNL HBL
F/Y F/Y
TD TE Ratio TD TE Ratio
**
Expres
2009/10 36843.61 3369.71 10.94 2009/10 39277.92 3439.2 sion is
faulty
**
**
Expres
2010/11 40132.74 3677.78 10.92 2010/11 42740.72 3995.48 sion is
faulty
**
** **
Expressi Expres
2011/12 37554.88 4122.17 on is 2011/12 49732.42 4632.01 sion is
faulty faulty
** **
** **
Expressi Expres
2012/13 41013.53 4617.57 on is 2012/13 55853.26 5299.71 sion is
faulty faulty
** **
2013/14 48236.01 5088.09 9.5 2013/14 67506.43 6083.41 **
Expres
 sion is
faulty
**
Mean 0 Mean 0
S.D. 0.99 S.D. 0.36
** **
Expressi Expres
CV on is CV sion is
faulty faulty
** **
(Source: Appendices)

Figure 4.6
Debt Equity Ratio

12.00

10.00

8.00

6.00 SCBNL
HBL

4.00

2.00

0.00
2009/10 2010/11 2011/12 2012/13 2013/14

In the above table the debt ratio of SCBNL & HBL are below the normal standard ratio 50% or
0.50. The debt ratio of SCBNL is in fluctuating trend. In F/Y 2009/10, the debt equity ratio of
SCBNL is 10.92% & from the F/Y 2010/11 to 2012/13 the debt Ratio decrease to 8.88% and
again increased to 9.50%. Therefore, SCBNL is use its debt equity is fluctuant. Similar the debt
equity ratio of HBL is also in fluctuating trend. In the F/Y 2009/10, the debt equity ratio of HBL
is 11.42%; it decreased to 10.54% from the F/Y 2010/11 to 2012/13 & again increased 11.10% in
the F/Y 2013/14. This mean HBL uses high debt financing compare to SCBNL. Although the
debt equity ratio is lower in both case compare to the standard ratio 0.5 or 50%, SCBNL has been
using its debt to equity less compare to HBL. Since both bank are less risky in borrowing its debt
to equity compare to standard ratio 50% but SCBNL is less risky in borrowing its debt to equity
compare to HBL.

From the view point of mean the debt equity ratio of HBL has higher mean (i.e. 10.90%) compare
to SCBNL (i.e. 9.87%) considering the mean ratio of HBL have high debt to equity compare to
SCBNL & HBL is more risky then SCBNL.

From the view point of S.D. SCBNL has higher S.D. of (i.e. 0.99) compare to HBL with S.D. of
(i.e. 0.36). It signifies that SCBNL has high fluctuation with respect to debt equity ratio. Similar,
HBL has low fluctuation with respect to debt equity ratio.

From the view point of CV SCBNL has higher CV of (i.e. 10.03 %) compare to HBL with CV of
(i.e. 3.30 %). it signifies that SCBNL is in consistent with respect to debt equity ratio. similar,
HBL is consistent with respect to debt equity ratio during the entire study period.

4.1.7 Equity Ratio:

The equity ratio is an investment solvency ratio that measures the amount of assets that are
financed by owners' investments by comparing the total equity in the company to the total assets.
The equity ratio highlights two important financial concepts of a solvent & sustainable business.
The first component shows how much of the total company assets are owned outright by the
investors. The second component inversely shows how leveraged the company is with debt. The
equity ratio measures how much of a firm's assets were financed by investors.

In general, higher equity ratios are typically favourable for companies. This is usually the case for
several reasons. Higher investment levels by shareholders shows potential shareholders that the
company is worth investing in since so many investors are willing to finance the company. A
higher ratio also shows potential creditors that the company is more sustainable and less risky to
lend future loans. Equity financing in general is much cheaper than debt financing because of the
interest expenses related to debt financing. Companies with higher equity ratios should have less
financing and debt service costs than companies with lower ratios.

Table 4.7
 Equity Ratio
(Amount in millions)
SCBNL HBL
F/Y F/Y
TE TA Ratio TE TA Ratio
** **
Expressi Expres
2009/10 3369.71 40213.32 on is 2009/10 3439.2 42717.12 sion is
faulty faulty
** **
** **
Expressi Expres
2010/11 3677.78 43810.52 on is 2010/11 3995.48 46736.2 sion is
faulty faulty
** **
** **
Expressi Expres
2011/12 4122.17 41677.05 on is 2011/12 4632.01 54364.43 sion is
faulty faulty
** **
** **
Expressi Expres
2012/13 4617.57 45631.1 on is 2012/13 5299.71 61152.97 sion is
faulty faulty
** **
2013/14 5088.09 53324.1 9.52 2013/14 6083.41 73589.84 8.26
Mean 0 Mean 0
S.D. 0.83 S.D. 0.24
** **
Expressi Expres
CV on is CV sion is
faulty faulty
** **
(Source: Appendices)

Figure 4.7
Equity Ratio
 12.00

10.00

8.00

6.00 SCBNL
HBL

4.00

2.00

0.00
2009/10 2010/11 2011/12 2012/13 2013/14

In the above table & figure the equity ratio of SCBNL & HBL are below the normal standard ratio
50%. The equity ratio of SCBNL is in fluctuating trend. In F/Y 2009/10, the equity ratio of
SCBNL is 8.38% & from the F/Y 2010/11 to 2012/13 the debt ratio decrease to 8.88% and again
increased to 9.52%. Therefore, SCBNL is use its equity is fluctuant. Similar the equity ratio of
HBL is also in fluctuating trend. In the F/Y 2009/10, the equity ratio of HBL is 8.05% which is
the lowest among the 5 years similarly in F/Y 2012/13 the equity ratio of HBL is highest. This
mean HBL uses high debt financing compare to SCBNL.

Although the debt equity ratio is lower in both case compare to the standard ratio 0.5 or 50%,
SCBNL has been using its debt to equity less compare to HBL. Since both bank are less risky in
borrowing its debt to equity compare to standard ratio 50% but SCBNL is less risky in borrowing
its debt to equity compare to HBL.

From the view point of mean the equity ratio of HBL has higher mean (i.e. 10.90%) compare to
SCBNL (i.e. 9.87%) considering the mean ratio of HBL have high equity compare to SCBNL &
HBL is more risky then SCBNL.

From the view point of S.D. SCBNL has higher S.D. of (i.e. 0.83) compare to HBL with S.D. of
(i.e. 0.24). It signifies that SCBNL has high fluctuation with respect to debt equity Ratio. Similar,
HBL has low fluctuation with respect to debt equity ratio.
From the view point of CV SCBNL has higher CV of (i.e. 8.96 %) compare to HBL with CV of
(i.e. 2.85 %). it signifies that SCBNL is in consistent with respect to debt equity Ratio. similar,
HBL is consistent with respect to debt equity ratio during the entire study period.

4.1.8 Return on Assets (ROA):

The Return on Assets or return on total assets, is a profitability ratio that measures the net income
produced by total assets during a period by comparing net income to the mean total assets. Since
company assets' sole purpose is to generate revenues and produce profits, this ratio helps both
management and investors see how well the company can convert its investments in assets into
profits. ROA measures how effectively a company can earn a return on its investment in assets.
Since all assets are funded either by equity or by debt, some investors try to ignore the costs of
acquiring the assets in the return calculation by adding back the interest expense. A higher ratio is
more favourable to investors because it shows that the company is more effectively managing its
assets to produce greater amounts of net income. ROA is most useful for comparing companies in
the same industry. The following table & figures shows the ROA of SCBNL & HBL.

Table 4.8
Return on Assets (ROA)
(Amount in millions)
SCBNL HBL
F/Y F/Y
NPAT TA Ratio NPAT TA Ratio
** **
Expressi Expres
2009/10 1085.87 40213.32 on is 2009/10 508.8 42717.12 sion is
faulty faulty
** **
**
Expres
2010/11 1119.17 43810.52 2.56 2010/11 893.12 46736.2 sion is
faulty
**
**
Expres
2011/12 1168.97 41677.05 2.81 2011/12 958.64 54364.43 sion is
faulty
**
2012/13 1217.94 45631.1 ** 2012/13 943.7 61152.97 **
Expressi Expres
 on is sion is
faulty faulty
** **
** **
Expressi Expres
2013/14 1336.59 53324.1 on is 2013/14 959.11 73589.84 sion is
faulty faulty
** **
Mean 0 Mean 0
S.D. 0.12 S.D. 0.3
** **
Expressi Expres
CV on is CV sion is
faulty faulty
** **
(Source: Appendices)

Figure 4.8
Return on Assets (ROA)

3.00

2.50

2.00

1.50 SCBNL
HBL

1.00

0.50

0.00
2009/10 2010/11 2011/12 2012/13 2013/14

In the above table & figure the ROA of both banks are fluctuant trend but SCBNL has higher
ROA compare to the ROA of HBL it means that the return of assets for SCBNL is more effective
in managing its assets to generate its net income.
From the viewpoint of mean, the ROA of SCBNL has higher mean (i.e. 2.65) compare to that of
HBL (i.e. 1.54) considering the mean ratio of SCBNL has more effective in generating its net
income compare to HBL.
From the view point of S.D. HBL has higher S.D. of (i.e. 0.30) compare to SCBNL with S.D. of
(i.e. 0.12). It signifies that HBL has high fluctuation with respect to ROA. Similar, HBL has low
fluctuation with respect to ROA.

From the view point of CV HBL has higher CV of (i.e. 19.48 %) compare to SCBNL with CV of
(i.e. 4.53 %). it signifies that HBL is in consistent with respect to ROA. similar, SCBNL is
consistent with respect to ROA during the entire study period.

4.1.9 Return on Equity (ROE):

The Return on Equity is a profitability ratio that measures the ability of a firm to generate profits
from its shareholders investments in the company. ROE is also an indicator of how effective
management is at using equity financing to fund operations & grow the company. Higher Ratios
are usually better than lower ratios, but have to be compared with other companies' Ratios in the
same industry. Many investors also choose to calculate the roe at the start of period & the end of
period to see the change in return. This helps to track company's progress & ability to maintain its
earnings trend. The following table & figures shows the roe of SCBNL & HBL.

Table 4.9
Return on Equity (ROE)
(Amount in millions)
SCBNL HBL
F/Y F/Y
NPAT TE Ratio NPAT TE Ratio
**
**
Express
Expressi
2009/10 1085.87 3369.71 2009/10 508.8 3439.2 ion is
on is
faulty
faulty **
**
**
**
Express
Expressi
2010/11 1119.17 3677.78 2010/11 893.12 3995.48 ion is
on is
faulty
faulty **
**
2011/12 1168.97 4122.17 28.4 2011/12 958.64 4632.01 **
Express
ion is
 faulty
**
**
Express
2012/13 1217.94 4617.57 26.4 2012/13 943.7 5299.71 ion is
faulty
**
2013/14 1336.59 5088.09 26.3 2013/14 959.11 6083.41 15.8
Mean 0 Mean 0
S.D. 2.57 S.D. 3.2
**
**
Expres
Expressi
CV CV sion is
on is
faulty
faulty **
**
(Source: Appendices)

Figure 4.9
Return on Equity (ROE)

35.00

30.00

25.00

20.00
SCBNL
15.00 HBL

10.00

5.00

0.00
2009/10 2010/11 2011/12 2012/13 2013/14
In the above table & figure, the ROE of both banks are fluctuant trend but SCBNL has higher
ROE compare to the ROE of HBL. Since the ROE for SCBNL is more effective management by
using its equity financing to fund the operations & it shows that ROE on SCBNL for its
shareholder is higher compare to the ROE of HBL for its shareholder that is lower.

From the view point of mean, the ROE of SCBNL has higher mean (i.e. 28.75) compare to that of
HBL (i.e. 18.29) considering the mean ratio of SCBNL more effective in managing its equity by
using equity financing more than that of HBL.

From the view point of S.D. HBL has higher S.D. of (i.e. 3.20) compare to SCBNL with S.D. of
(i.e. 2.57). It signifies that HBL has high fluctuation with respect to roe. Similar, HBL has low
fluctuation with respect to roe.

From the view point of CV HBL has higher CV of (i.e. 17.50 %) compare to SCBNL with S.D. of
(i.e. 8.94 %). it signifies that HBL is in consistent with respect to roe. similar, SCBNL is
consistent with respect to roe during the entire study period.

4.1.10 Correlation Coefficient between Working Capital & Net Profit

The correlation coefficient between net working capital & net profit measures the degree of
relationship between net working capital & net profit in these banks. In the correlation analysis,
working capital is independent variable (Y) & net profit is dependent variable (X). The purpose of
computing the correlation coefficient is to justify whether the net working capital generates net
profit or not & whether there is any relationship between these two variables.

Table 4.10
Bank’s Name r P.E. 6 P.E. Remarks
SCBNL 0.96 0.03 0 Significant
HBL 0.66 0.17 0 Not significant
(Source: Appendices)

From the above table the correlation coefficient between working capital & net profit of SCBNL
is 0.958 & HBL is 0.658, which shows highly positive relationship between working capital & net
profit in SCBNL & HBL. Considering the probable error the value of 'r', 0.958 is greater than
‘6PE’ 0.150 in SCBNL hence the value of ‘r’ is significant & the value of 'r', 0.658 is less than
‘6PE’ 1.026 in HBL the value of 'r' is not significant.

4.1.11 Correlation Coefficient between Loan & Advances & Total Deposits :

The correlation coefficient between loan & advances & total deposits measures the degree of
relationship between loan & advances & total deposits. In correlation analysis, total deposit is
independent variable & loan & advance is dependent variable. The purpose of computing
coefficient of correlation is to justify whether the deposits are significantly used in loan &
advances or not & whether there is any relationship between these two variables.

Table 4.11
Bank’s Name r P.E. 6 P.E. Remarks
SCBNL 0.92 0.05 0 Significant
HBL 0.99 0.01 0 Significant
(Source: Appendices)
From the above table we can find that correlation coefficient between loan & advances & total
deposits (r) of SCBNL is 0.915 & HBL is 0.992, which shows highly positive relationship
between loans & advances & total deposits. Considering the probable error the value of 'r', 0.915
is greater than ‘6PE’ 0.294 in SCBNL & the value of 'r', 0.992 is greater than ‘6PE’ 0.030 in HBL
the value of 'r' is significant in both banks.

4.1.12 Correlation Coefficient between Net Profit & Investments :

The correlation coefficient between net profit & investment is to measure the degree of
relationship between major components of net profit & investment on bank. In correlation
analysis, net profit (X) is independent variable & investment (Y) dependent variable. The purpose
of computing the correlation coefficient is to justify whether the investment generates profit or not
& whether there is any relationship between these two variables.

Table 4.12
Bank’s Name r P.E. 6 P.E. Remarks
SCBNL -0.940 0.04 00 Significant
 HBL 0.49 0.23 0 Not significant
(Source: Appendices)

From the above table the coefficient of correlation between net profit & investments (r) of
SCBNL is 0.940 & HBL is 0.493, which shows highly positive relationship between net working
capital & net profit in SCBNL & HBL. Considering the probable error the value of 'r', 0.940 is
greater than ‘6PE’ 0.210 in SCBNL hence the value of ‘r’ is significant, & the value of 'r', 0.493 is
less than ‘6PE’ 1.368 in HBL the value of 'r' is not significant.

Trend Analysis

Trend analysis is a mathematical method, which is widely used to find out future tendencies based
on past assumptions. Furthermore, it is applied for finding out a trend line for those series, which
charge periodically in absolute amount. Hence, the current value (F/Y 2009/10 to F/Y 2013/14) &
future value (F/Y 2014/15 to F/Y 2018/19) have been analyzed and forecasted with the help of
trend analysis.

4.1.13 Trend Analysis of Loans & Advances

Trend analysis shows the trend of loans & advances of selected banks for ten years. The trend
analysis shows the loans & advances from the F/Y 2009-10 to F/Y 2013-14 & the coming 5 years
followed by the value of Y (Loans & Advances).

Table 4.13
Trend Analysis on Loans & Advances
(Amount in millions)
F/Y SCBNL HBL
2009/10 15956.96 27980.63
2010/11 18427.27 31566.98
2011/12 19575.97 34965.43
2012/13 22828.84 39723.81
2013/14 25976.58 45320.36
2014/15 27885.36 48762.33
2015/16 30329.44 53045.96
2016/17 32773.52 57329.59
2017/18 35217.6 61613.22
2018/19 37661.68 65896.85
Regression line Y=13,220.88 + 2,444.08 X Y=23,060.56 + 4,283.63 X
(Source: Appendices)
 Figure 4.10
Trend Analysis on Loans & Advances

70,000.00

60,000.00

50,000.00
LOANS AND ADVANCES

40,000.00

30,000.00
SCBNL
20,000.00 HBL

10,000.00

-
0 1 2 3 4 5 6 7 8 9
9 /1 0 /1 1 /1 2 /1 3 /1 4 /1 5 /1 6 /1 7 /1 8 /1
0 1 1 1 1 1 1 1 1 1
20 20 20 20 20 20 20 20 20 20

FISCAL YEAR

In the above table & figure, the trend analysis shows that loans & advances has positive
relationship with the time, thus the value of loans & advances increases in each year. As a result,
the estimated future value on loans & advances for the F/Y 2014/15 is to be estimated 27,885.37m
in SCBNL & 48,762.33m in HBL, Similarly in the F/Y 2015/16 the value of loans & advances is
to be estimated 30,329.45m in SCBNL & 53,045.96m in HBL. in the F/Y 2016/17 the value of
loans & advances is to be estimated 32,773.53m in SCBNL & 57,329.59m in HBL, in the F/Y
2017/18 the value of loans & advances is to be estimated 35,217.61m in SCBNL & 61,613.22m in
HBL & in the F/Y 2018/19 the value of loans & advances is to be estimated 37,661.69m in
SCBNL & 65,896.84m in HBL respectively.

Similarly, the regression line on loans & advances (Y) indicates that the loans & advances has
been increased by Rs. 2,444.08m in SCBNL per year & Rs. 4,283.63m in HBL per year when
other variable remains uniform. Thus, it can be concluded that the growth on loans & advances in
HBL for the coming 5 year (i.e. from F/Y 2014/15 to F/Y 2018/19) is higher compare to the
growth on loans & advances in SCBNL for the coming 5 year (i.e. from F/Y 2014/15 to F/Y
2018/19).
4.1.14 Trend Analysis on Total Deposits

Trend analysis shows the trend of total deposits of selected banks for ten years. The trend analysis
shows the total deposits from the F/Y 2009-10 to 2013-14 & the coming 5 years are followed by
the value of Y (Total Deposits).

Table 4.14
Trend Analysis on Total Deposits
(Amount in millions)
F/Y SCBNL HBL
2009/10 35182.72 37611.2
2010/11 37999.24 40920.63
2011/12 35965.63 47730.99
2012/13 39466.45 53072.32
2013/14 46298.53 64674.85
2014/15 46092.15 68685.7
2015/16 48462.03 75313.6
2016/17 50831.91 81941.5
2017/18 53201.79 88569.4
2018/19 55571.67 95197.3
Regression Line Y= 31,872.87 + 2,369.88 X Y= 28,918.30 + 6,627.90 X
(Source: Appendices)
Figure 4.11
Trend Analysis on Total Deposits

100,000.00
90,000.00
80,000.00
70,000.00
60,000.00
TOTAL DEPOSITS

50,000.00
40,000.00
SCBNL
30,000.00 HBL
20,000.00
10,000.00
-
0 1 2 3 4 5 6 7 8 9
9 /1 0 /1 1 /1 2 /1 3 /1 4 /1 5 /1 6 /1 7 /1 8 /1
2 00 2 01 2 01 2 01 2 01 2 01 2 01 2 01 2 01 2 01

FISCAL YEAR
In the above table & figure, the trend analysis shows that total deposits has positive relationship
with the time, thus the value of total deposits increases in each year. As a result, the estimated
future value on total deposits for the F/Y 2014/15 is to be estimated 46,092.16m in SCBNL &
68,685.70m in HBL, Similarly in the F/Y 2015/16 the value of total deposits is to be estimated
48,462.05m in SCBNL & 75,313.59m in HBL, in the F/Y 2016/17 the value of total deposits is to
be estimated 50,831.93m in SCBNL & 81,941.49m in HBL, in the F/Y 2017/18 the value of total
deposits is to be estimated 53,201.81m in SCBNL & 88,569.39m in HBL & in the F/Y 2018/19
the value of total deposits is to be estimated 55,571.70m in SCBNL & 95,197.29m in HBL
respectively.

Similarly, the regression line on total deposits (Y) indicates that the total deposits has been
increased by Rs. 2,369.88m in SCBNL & Rs. 6,627.90m in HBL when other variable remains
uniform. Thus, it can be concluded that the growth on total deposits in HBL for the coming 5 year
(i.e. from F/Y 2014/15 to F/Y 2018/19) is higher compare to the growth on total deposits in
SCBNL for the coming 5 year (i.e. from F/Y 2014/15 to F/Y 2018/19).

4.2 Major Findings of the Analysis

The major findings of the above presentation of data

1. The workings capitals to total assets of both banks have are in fluctuant position referring to
the mean & S.D. SCBNL is higher than HBL where as the CV of HBL is higher comparing to
SCBNL.
2. The liquidity position of SCBNL is better than that of HBL. Since both ratio are equal in both
bank’s own ratio the mean the CR & QR of SCBNL has higher mean than that of HBL.
Similarly based on CV HBL has higher CV compared to SCBNL but the of S.D. both banks is
equal.
3. The liquidity position of cash ratio is higher in SCBNL compare to HBL since both banks are
in fluctuant position the mean; S.D. & CV of SCBNL is higher compare to HBL.
4. Based on Capital Structure the debt ratio & debt equity ratio is higher in HBL compare to
SCBNL which mean the use of debt is more compare to the use of equity. The mean of both
debt ratio & debt equity ratio is higher in HBL compare to the debt ratio & debt equity ratio
 SCBNL. Similarly, the S.D. & CV of both debt ratio & debt equity ratio is higher in SCBNL
compare to the debt ratio & debt equity ratio HBL.
5. The equity ratio of SCBNL is higher compare to HBL because the use of equity financing is
more compare to the use debt financing. In case of mean, S.D. & CV SCBNL has higher
equity financing compare to HBL.
6. The profitability position of SCBNL is also better compare to that of HBL. Based on mean in
ROA & ROE SCBNL have higher mean compare to HBL. Similarly based on S.D. & CV
HBL has higher S.D. & CV compared to that of SCBNL.
7. The relationship of correlation coefficient between net profit after tax & working capital
SCBNL is significant. Since ‘r’ > ‘6PE’ the value of r is significant but incise of HBL it is not
significant because value of ‘r’ < ‘6PE’ the value of r of is not significant.
8. The relationship of correlation coefficient between loans & advances & total deposits is
significant in both banks. Since ‘r’ > ‘6PE’ the value of r of is significant.
9. The relationship of correlation coefficient between loans & advances & total deposits SCBNL
is significant. Since ‘r’ > ‘6PE’ the value of r is significant but in case of HBL it is not
significant because value of ‘r’ < ‘6PE’ the value of r of is not significant.
10. The trend analysis of loans & advances & total deposits is higher in HBL compare the trend
analysis of loans & advances & total deposits of SCBNL.

CHAPTER 5
SUMMARY CONCLUSION & RECOMMENDATION

This chapter summarize the whole study regarding the working capital management, draws the
conclusions based on the study & recommendations for more better & efficient management of
working capital management of Standard Chartered Bank Nepal Limited & Himalayan Bank
Limited.

5.1 SUMMARY

Banks plays an important role in the development of an economy. The growth rate of an economy
depends upon the rate of investment, which in fact depends on the level of saving. Higher saving
leads to higher level of capital formation, which is crucial for the growth, & development of an
economic. The primary function of the bank is to accept deposits from the customers & provide
loans to those who need them. Therefore, banks play an important role in mobilizing saving for
capital formation.

Commercial banks are the major financial institutions that occupy quite an important place in the
framework in the economy development sector as well as in saving & investment sector.
Commercial acts as the supplier of finance to trade & industry & play a vital role in the economic
& financial development of the country.

After the implementation of open market policy various joint venture companies, commercial
banks, & finance companies are opened as private banks & finance companies. The liberal trade
& investment policies have facilitated joint venture’s banks to invest in Nepal. Joint Venture’s
banks have been helpful in transferring foreign investment & advanced technology from one
country to another country. Thus, this establishment of joint venture’s banks gave a new prospect
in the financial sector of the study.

Since commercial banks are income oriented organization proper financial decision making
regarding banking transaction are crucial for its efficiency & profitability. Most of the decisions
are related to current assets & current liabilities. Similar working capital management is also
related to current assets & current liabilities. Generally, working capital is regarded as the
difference between current assets & current liabilities of its company. Thus working capital
management is regarded as one of the conditioning factor in the decision making issue of
commercial banks. Hence, working capital management relates to the problems that arise in
attempting to manage the current assets, current liabilities & the interrelationship that exist
between them.

The main objective of this study is to study the comparative study of working capital management
position as well as the financial performance of the commercial banks of Nepal. Since several
organizations were available for the research on working capital, management the researcher has
taken two SCBNL & HBL for this study. To fulfil this objective & other objective, which has
been specified in the introduction chapter & an appropriate research methodology, has been
developed that include ratio analysis as the part of financial tools & correlation coefficient &
trend analysis as the part of statistical tools.

The ratio analysis includes liquidity position, capital structure position & profitability position. In
order to test the relationship between various components of working capital management Karl
Pearson’s correlation coefficient & trend analysis has been calculated & analysed. The necessary
data that were needed for the calculation has been extracted from the annual report’s balance
sheet & profit & loss account of the respective banks for the period of five F/Y 2066/67 B.S.
(2009/10 A.D.) to 2070/71 B.S. (2013/14 A.D.).

In the chapter an attempt has been made to present the summary of the earlier chapter, conclusion
has been made based on major findings & recommendation has been given based on major
findings & conclusion at the end of the study.

5.2 CONCLUSION

Working capital is regarded as the lifeblood & nerve of the business concerned & is essential for
smooth operation of any organization. Based on research the researcher has concluded that
working capital management not only deals with current assets & current liabilities but it also
deals with profitability of the company regarding working capital. From the above findings in
chapter four the following conclusion has been drawn:

1. It is difficult to point out how much working capital is need by a particular business. A firm
that is not willing to take financial risk can go for more short-term liquidity. As per the study
in the previous chapter it seems that both the banks has a good growth rate on its working
capital
2. On the basis of liquidity position of SCBNL & HBL with reference to the data as current ratio,
quick ratio & cash ratio the average of current ratio, quick ratio & cash ratio is higher in
SCBNL compare to the average of HBL .Hence the SCBNL has a better liquidity position
compare to HBL because it has the ability to pay its current liabilities with its current assets.
3. Capital structure refers to the composition of all total debt & total equity of the company. On
the basis of capital structure position of the selected banks the average of debt ratio & debt
equity ratio of HBL is higher compare to the debt ratio & debt equity ratio of SCBNL it
means the use of debt financing is more than the use of equity financing. Since debt ratio &
debt, equity ratio the firm must pay higher rate of interest on its borrowings. Similarly, the
average of equity ratio is higher in SCBNL compare to the equity ratio of HBL. Since equity,
financing in general is much cheaper than debt financing because of the interest expenses
related to debt financing. Companies with higher equity ratios should have less debt financing
& debt service costs than companies with lower ratios. Since the use of debt should be lower
 & use of equity should be higher, hence the capital position of SCBNL is better than that of
HBL.
4. The profitability ratio measures the operating efficiency of the firm. Profitability ratios are
usually computed by relating it either with sales or with investment as a ratio. Based on
investment as the profitability ratio the average of ROA & ROE of SCBNL is higher compare
to the ROA & ROE of HBL. Since higher ROA is more favourable to investors because it
shows that, the company is more effectively managing its assets to produce greater amounts of
net income. Similarly higher ROE is more favourable based on the investor’s view because
higher return on equity indicates that the company is using its investors' funds effectively
compare to the lower ROE. Hence, the profitability position of SCBNL is better than HBL.
5. The correlation coefficient between the variables net profit after tax & working capital in
SCBNL (i.e. 0.958) is positive correlation of coefficient which shows that there is a positive
relationship between net profit after tax & working capital. Similarly the correlation
coefficient between the variables net profit after tax & working capital in HBL (i.e. 0.658) has
a positive correlation of coefficient which shows that there is a positive relationship between
net profit after tax & working capital. Considering the probable error (i.e. 6 PE) the researcher
found that the correlation coefficient between net profit after tax & working capital is highly
significant in case of SCBNL because the value of r is greater than the value of 6 PE &
insignificant in case of HBL because the value of r is less than the value of 6 PE.
6. The correlation coefficient between the variables loans & advances & total deposits SCBNL
(i.e. 0.915) is positive correlation of coefficient which shows that there is a positive
relationship between loans & advances & total deposits. Similarly the correlation coefficient
between the variables loans & advances & total deposits in HBL (i.e. 0.992) has a positive
correlation of coefficient which shows that there is a positive relationship between loans &
advances & total deposits. Considering the probable error (i.e. 6 PE) the researcher found that
the correlation coefficient between loans & advances & total deposits is highly significant in
both the banks because the value of r is greater than the value of 6 PE.
7. The correlation coefficient between the variables net profit after tax & investment in SCBNL
(i.e. - 0.940) is negative correlation of coefficient which shows that there is a negative
relationship between net profit after tax & investment. Similarly the correlation coefficient
between the variables net profit after tax & investment in HBL (i.e. 0.493) has a positive
correlation of coefficient, which shows that there is a positive relationship between net profit
& investment. Considering the probable error (i.e. 6 PE) the researcher found that the
 correlation coefficient between net profit after tax & investment is significant in SCBNL &
insignificant in HBL of because the value of r is less than the value of 6 PE.
8. The trend analysis shows the future forecast of loans & advances & total deposits in the study.
Since both banks have growth in the trend of loans & advances & total deposits it seems that
both banks will have a growth in the trend line on loans & advances & total deposits in the
future.

5.3 RECOMMENDATION

Based on the above study in the previous chapter major findings & conclusion the following
recommendation has been made:
1. Working capital is essential to meet its short-term obligation. A positive working capital
indicates that there is a good financial management in the bank whereas a negative working
capital indicates that there is a poor financial management in the bank. Since there is, a growth
in the working capital both the bank should maintain its optimal use of its current assets &
current liabilities.
2. The current ratio of SCBNL is better than HBL. Since the CR of the both bank is higher than 1
the bank has its ability to pay its liabilities. If the bank has, more than sufficient amount of
current assets there is a high amount of idle funds available in the bank that results
unproductive for the bank. Since the ratios of both banks are above 1:1 ratio, both banks
should to utilize its idle funds to decrease its current assets.
3. The quick ratio of SCBNL is better than HBL. Since the QR of the both bank is higher than 1
the bank has its ability to pay its liabilities. If the bank has, more than sufficient amount of
current assets there is a high amount of idle funds available in the bank that results
unproductive for the bank. Since the ratios of both banks are above 1:1 ratio, both banks
should to utilize its idle funds to decrease its current assets.
4. The cash ratio indicates that the payment of its liabilities of is done through cash & cash
equivalent. Lower cash ratio indicates that the bank needs more than just its cash reserve to
pay its debt whereas higher cash ratio indicates that all its liabilities can be paid with cash &
cash equivalent easily. Since the cash ratio is below 1 in both the banks should utilize its idle
funds to increase its cash & cash equivalents.
5. Capital structure ratio is related to the debt & equity if the company. Higher debt ratio
indicates that the organization pays high interest rate on its borrowing therefore it is more
risky whereas the lower debt ratio indicates that the organization have low overall debt
 therefore its less risky. Since the standard measure of capital structure is 50% debt & 50%
equity both the banks have to reduce its debt financing by borrowing less amount of debt &
increase its equity finking by issuing more shares to its shareholder’s & general public.
6. The return on assets for both the banks is unsatisfactory level. Since ROA is decreasing in
both banks, which mean that, the banks are unable to generate enough amount of net profit on
its total assets. Hence, the banks must utilize its total assets to generate more net profit.
7. The return on equity for both the banks is unsatisfactory level. Since ROE is decreasing in
both banks, the banks are unable to generate enough amount of net profit on its total equity.
Hence, the banks must increase its total equity by issuing its share capital to generate more net
profit.
8. The correlation coefficient between net profit & working capital is highly significant in
SCBNL & in significant in HBL. Since SCBNL has high significant on correlation coefficient
it should maintain its constant relationship between net profit & working capital. Whereas
HBL should increase its correlation coefficient relationship between net profit & working
capital.
9. The correlation coefficient between loans &advance & total deposits is highly significant in
SCBNL & HBL. Hence, both banks should maintain its loans & advance & total deposits
relationship at a constant rate.
10. The correlation coefficient between net profit & investment is highly negative significant in
SCBNL & low degree of positive significant in HBL. Since SCBNL has highly negative
significant on correlation coefficient it should maintain its relationship net profit & working
capital in constant rate where as HBL should increase its correlation coefficient relationship
between net profit & investment.
11. The trend analysis in loans & advance & total deposits in both banks are in the positive state
but the trend of HBL is higher compare to SCBNL. Hence, SCBNL should increase its amount
of loans & advances & total deposits to maintain same trend as HBL.
 BIBLIOGRAPHY

Related Books:

Bajracharya, B.C. (2061). Business Statistic. Kathmandu: M. K. Publishers &

Distribution.
Hampton, J. J. & Wagner, C. L. (1989) Working Capital Management. John Wiley
& Sons Canada, Limited.
Howard, K.W. & P.R. Pant (2002) Social Science Research and Thesis Writing,
Buddha Academic Publishers and Distributors.
Joshi, S. & Dangol, R.M. (2056). Business Finance. Kathmandu: Teleju Prakashan.
Paudel, R.B., Baral, K.J., Gautam, R.R. & Rana, S.B. (2007). Corporate Financial
Management. Kathmandu: Asmita Publication.
Pandey, I.M. (1995), Financial Management, New Delhi: Vikash Publishing House.
Shrestha, S. & Silwal, D.P (2059). Statistical Methods for Management.
Kathmandu: Teleju Prakashan.
Van Horne, J. C. (2000), Financial Management & Policy, New Delhi: Prentice Hall
of India Pvt. Ltd.
Western, J.F. & Brigham, E.F. (1996), Managerial Finance, New York: Dryden
Press.

Related Journals, Reports & Articles:

Acharya, K. (1985), "Problems & Implements in the Management of Working

Capital in Nepalese Enterprises", ISDOS Bulletin, Kathmandu: Vol. 10.
Mahat, L.D. (2004), "Spontaneous Sources of Working Capital Management",
The Kathmandu Post, Kathmandu: Vol. 12.
Shrestha, K.M. (1982), "Working Capital Management in Public Enterprises: A
Study on Financial Result & Constraint", ISDOC Bulletin, Kathmandu: Vol. 8,
No.14.
Annual Reports of SCBNL. (2009/10 to 2013/14)
Annual Reports of HBL. (2009/10 to 2013/14).
Related Published & Unpublished Thesis:

Aryal, B.P. (2002). A Study on Working Capital Management of Nepal Tele

Communication Corporation. Master’s Degree Thesis. Kathmandu: Shanker Dev
Campus, T.U.
Dahal, D. (2013) A Case Study of Working Capital Management & its Impact
with reference to NIC & NABIL Bank. Master’s Degree Thesis. Kathmandu:
Shanker Dev Campus, T.U.
Gautam, P. (2004). A Study on Working Capital Management of Soaltee Crown
Plaza. Master’s Degree Thesis. Kathmandu: Shanker Dev Campus, T.U
Joshi, R.R. (2014) Working Capital Management of banks In Nepal with special
reference to NIBL, HBL, EBL & NABIL. An Unpublished Master’s Degree Thesis.
Kathmandu: Shanker Dev Campus, T.U.
Kunwar, P. (2005).Working Capital Management of Pharmaceutical Industry of
Nepal with Reference to Royal Drugs Limited. Master’s Degree Thesis.
Kathmandu: Shanker Dev Campus, T.U.
Mainali, T.R. (2012) Working Capital Management of Bank of Kathmandu Ltd.
Master’s Degree Thesis. Kathmandu: Shanker Dev Campus, T.U.
Shrestha, B. (2001), A Working Capital Management of Dairy Development
Corporation. Master Degree Thesis, Putalisadak, Shanker Dev Campus, T.U.
Tuladhar, A. (2007), A Comparative Study of Working Capital Management of
NABIL & SCBNL. Master Degree Thesis, Putalisadak, Shanker Dev Campus, T.U.

Websites:
http://www.google.com
http://www.himalayanbank.com
http://www.sc.com/np
 Appendices 1 A
Working Capital to Total Assets SCBNL
X X ( X −X ) ( X −X )2
8 9.2 0 0
8.95 9.2 0 0
9.68 9.2 0 0
9.95 9.2 0 0
9.42 9.2 0 0
0 0 0 0

X=
∑ X = 46.00 =9.20
N 5
2
∑ ( X−X )
σ=
√N−1
σ
=
2.34
5−1
=
√
0.77
2.34
4 √
=√ 0.59=0.77

CV = X 100= X 100=8.37
X 9.20

Appendices 1B
Working Capital to Total Assets HBL
X X ( X −X ) ( X −X )2
6.73 7.46 0 0
7.1 7.46 0 0
7.04 7.46 0 0
8.47 7.46 0 0
7.96 7.46 0 0
0 0 0 0

X=
∑ X = 37.30 =7.46
N 5
2
∑ ( X−X )
σ=
√N−1
σ
=
2.11
5−1
=
√
0.73
2.11
4 √
=√ 0.53=0.73

CV = X 100= X 100=9.79
X 7.46

Appendices 2 A
Current Ratio SCBNL
 X X ( X −X ) ( X −X )2
1.09 1.1 0 0.01
1.1 1.1 0 0
1.1 1.1 0 0
1.11 1.1 0 0.01
1.1 1.1 0 0
0 0 0 0

X=
∑ X = 5.50 =1.10
N 5
2
∑ ( X−X )
σ=
√ σ
N−1
=
0.0002

0.01
√
5−1 √
=
0.0002
4
=√ 0.0001=0.01

CV = X 100= X 100=0.91
X 1.10

Appendices 2 B
Current Ratio HBL
X X ( X −X ) ( X −X )2
1.07 1.08 0 0.01
1.07 1.08 0 0.01
1.08 1.08 0 0
1.09 1.08 0 0
1.09 1.08 0 0
0 0 0 0

X=
∑ X = 5.40 =1.08
N 5
2
∑ ( X−X )
σ=
√N−1
σ
=
0.0004
5−1
0.01
√
=
0.0004
4 √ =√ 0.0001=0.01

CV = X 100= X 100=0.93
X 1.08

Appendices 3 A
Quick Ratio SCBNL
X X ( X −X ) ( X −X )2
1.09 1.1 0 0.01
 1.1 1.1 0 0
1.1 1.1 0 0
1.11 1.1 0 0.01
1.1 1.1 0 0
0 0 0 0

X=
∑ X = 5.50 =1.10
N 5
2
∑ ( X−X )
σ=
√ σ
N−1
=
0.0002

0.01
√
5−1 √
=
0.0002
4
=√ 0.0001=0.01

CV = X 100= X 100=0.91
X 1.10

Appendices 3 B
Quick Ratio HBL
X X ( X −X ) ( X −X )2
1.07 1.08 0 0.01
1.08 1.08 0 0.01
1.07 1.08 0 0
1.09 1.08 0 0
1.09 1.08 0 0
0 0 0 0

X=
∑ X = 5.40 =1.08
N 5
2
∑ ( X−X )
σ=
√ σ
N−1
=
0.0004

0.01
√
5−1
=
√0.0004
4
=√ 0.0001=0.01

CV = X 100= X 100=0.93
X 1.08

Appendices 4 A
Cash Ratio SCBNL
X X ( X −X ) ( X −X )2
0.05 0.13 0 0.01
0.07 0.13 0 0
0.17 0.13 0 0
 0.16 0.13 0 0
0.2 0.13 0 0
0 0 0 0

X=
∑ X = 0.65 =0.13
N 5
2
∑ ( X−X )
σ=
√N−1
σ
=
0.0174
5−1
0.07
√
=
0.0174
4√ =√ 0.0044=0.07

CV = X 100= X 100=53.85
X 0.13
Appendices 4 B
Cash Ratio HBL
X X ( X −X ) ( X −X )2
0.1 0.09 0 0
0.07 0.09 0 0
0.13 0.09 0 0
0.07 0.09 0 0
0.08 0.09 0 0
0 0 0 0

X=
∑ X = 0.45 =0.09
N 5
2
∑ ( X−X )
σ=
σ
√ N−1
CV = X 100=
=
0.0026

0.03
5−1√ =
0.0026
√ 4
X 100=33.33
=√ 0.0007=0.03

X 0.09

Appendices 5 A
Debt Ratio SCBNL
X X ( X −X ) ( X −X )2
91.62 90.74 0 0
91.61 90.74 0 0
90.11 90.74 0 0
89.9 90.74 0 0
 90.46 90.74 0 0
0 0 0 0

X=
∑ X = 453.70 =90.74
N 5
2
∑ ( X−X )
σ=
√ σ
N−1
=
2.72
√
5−1
0.82
=
√2.72
4
= √0.68=0.82

CV = X 100= X 100=0.90
X 90.74
Appendices 5 B
Debt Ratio HBL
X X ( X −X ) ( X −X )2
91.95 91.59 0 0
91.45 91.59 0 0
91.48 91.59 0 0
91.34 91.59 0 0
91.73 91.59 0 0
0 0 0 0

X=
∑ X = 457.95 =91.59
N 5
2
∑ ( X−X )
σ=
√ σ
N−1
=
0.24
√
5−1
0.24
=
√0.24
4
=√ 0.06=0.24

CV = X 100= X 100=0.26
X 91.59

Appendices 6 A
Debt Equity Ratio SCBNL
X X ( X −X ) ( X −X )2
10.94 9.87 0 0
10.92 9.87 0 0
9.11 9.87 0 0
8.88 9.87 0 0
9.5 9.87 0 0
0 0 0 0
 X=
∑ X = 49.35 =9.87
N 5
2
∑ ( X−X )
σ=
√ σ
N−1
=
3.94
√
5−1
0.99
=
√3.94
4
=√ 0.99=0.99

CV = X 100= X 100=10.03
X 9.87

Appendices 6 B
Debt Equity Ratio HBL
X X ( X −X ) ( X −X )2
11.42 10.9 0 0
10.7 10.9 0 0
10.74 10.9 0 0
10.54 10.9 0 0
11.1 10.9 0 0
0 0 0 0

X=
∑ X = 46.00 =10.90
N 5
2
∑ ( X−X )
σ=
√N−1
σ
=
0.51
5−1
=

0.36
0.51
√4 √
= √0.13=0.36

CV = X 100= X 100=3.30
X 10.90

Appendices 7 A
Equity Ratio SCBNL
X X ( X −X ) ( X −X )2
8.38 9.26 0 0
8.39 9.26 0 0
9.89 9.26 0 0
10.12 9.26 0 0
9.52 9.26 0 0
0 0 0 0
 X=
∑ X = 46.30 =9.26
N 5
2
∑ ( X−X )
σ=
√N−1
σ
=
2.74
5−1
=
√
0.83
2.74
4 √
=√ 0.69=0.83

CV = X 100= X 100=8.96
X 9.26
Appendices 7 B
Equity Ratio HBL
X X ( X −X ) ( X −X )2
8.05 8.41 0 0
8.55 8.41 0 0
8.52 8.41 0 0
8.67 8.41 0 0
8.26 8.41 0 0
0 0 0 0

X=
∑ X = 42.05 =8.41
N 5
2
∑ ( X−X )
σ=
√ σ
N−1
=
0.25
√
5−1
0.24
=
√0.25
4
=√ 0.0.6=0.24

CV = X 100= X 100=2.85
X 8.41
 Appendices 8 A
Return on Assets (ROA) SCBNL
X X ( X −X ) ( X −X )2
2.7 2.65 0 0
2.56 2.65 0 0
2.81 2.65 0 0
2.67 2.65 0 0
2.51 2.65 0 0
0 0 0 0

X=
∑ X = 13.25 =2.65
N 5
2
∑ ( X−X )
σ=
√N−1
σ
=
0.0562
5−1
0.12
√
=
0.0562
4 √
=√ 0.0141=0.12

CV = X 100= X 100=4.53
X 2.65

Appendices 8 B
Return on Assets (ROA) HBL
X X ( X −X ) ( X −X )2
1.19 1.54 0 0
1.91 1.54 0 0
1.76 1.54 0 0
1.54 1.54 0 0
1.3 1.54 0 0
0 0 0 0

X=
∑ X = 46.00 =1.54
N 5

2
∑ ( X−X )
σ=
√ N−1
=
0.37
√
5−1
=
√0.37
4
=√ 0.09=0.30

σ 0.30
CV = X 100= X 100=19.48
X 1.54

Appendices 9 A
 Return on Equity (ROE) SCBNL
X X ( X −X ) ( X −X )2
32.22 28.75 0 0
30.43 28.75 0 0
28.4 28.75 0 0
26.4 28.75 0 0
26.3 28.75 0 0
0 0 0 0

X=
∑ X = 143.75 =28.75
N 5
2
∑ ( X−X )
σ=
√N−1
σ
=
26.50
5−1
=

2.57
√26.50
4 √= √ 6.63=2.57

CV = X 100= X 100=8.94
X 28.75

Appendices 9 B
Return on Equity (ROE) HBL
X X ( X −X ) ( X −X )2
14.79 18.29 0 0
22.35 18.29 0 0
20.7 18.29 0 0
17.81 18.29 0 0
15.8 18.29 0 0
0 0 0 0

X=
∑ X = 46.00 =18.29
N 5
2
∑ ( X−X )
σ=
√ σ
N−1
=
40.97
√
5−1
3.20
=
√40.97
4
= √ 10.24=3.20

CV = X 100= X 100=17.50
X 18.29
 Appendices 10 A
Calculation of Correlation Coefficient Between NPAT & WC
SCBNL

F/Y NPAT (X) WC (Y) X² Y² XY

2009/10 1085.87 3251.17 0 0 0
2010/11 1119.17 3921.71 0 0 0
2011/12 1168.97 4032.54 0 0 0
2012/13 1217.94 4536.05 0 0 0
2013/14 1336.59 5019.37 0 0 0
0 0 0 0 0

We Have,

N=5

∑ X = 5,928.54

∑ Y= 20,760.84

∑X2 = 7,067,996.68

∑Y2= 87,981,119.34

∑XY = 24,866,802.92

N ∑ XY −∑ X ∑ Y
r=
√ N ∑ X 2−( X )2 X √ N ∑ Y 2−(Y )2
5 X 24,866,802.92−5,928.54 X 20,760.84
r=
√ 5 X 7,067,996.68−(5,928.54)² X √5 X 87,981,119.34−(20,760.84)2
1,252,544.23
r=
√ 192,396.87 X √ 8,893,119.19
1,252,544.23
r= =0.958
1,308,055.16

1−r ²
P . E .=0.6745 X
√N
1− ( 0.958 )2
P . E .=0.6745 X
√5
P . E .=0.025

6 P . E .=6 X P . E .=6 X 0.025=0.150

 Appendices 10 B
Calculation of Correlation Coefficient Between NPAT & WC
HBL

F/Y NPAT (X) WC (Y) X² Y² XY

2009/10 508.8 2877.33 0 0 0
2010/11 893.12 3317.99 0 0 0
2011/12 958.64 3826.64 0 0 0
2012/13 943.7 5179.36 0 0 0
2013/14 959.11 5860.6 0 0 0
0 0 0 0 0

We Have,

N=5

∑ X = 4,263.37

∑ Y= 21,061.92

∑X2 = 3,785,993.10

∑Y2= 95,103,661.63

∑XY = 18,604,441.00

N ∑ XY −∑ X ∑ Y
r=
√ N ∑ X 2−( X )2 X √ N ∑ Y 2−(Y )2
5 X 18,604,441.00−4,263.37 X 21,061.92
r=
√ 5 X 3,785,993.10−(4,263.37)² X √5 X 95,103,661.63−(21,061.92)2
3,227,447.13
r=
√ 753,641.74 X √ 31,913,834.06
1,252,544.23
r= =0.658
4,904,242.80

1−r ²
P . E .=0.6745 X
√N
1−(0.658) ²
P . E .=0.6745 X
√5
P . E .=0.171

6 P . E .=6 X P . E .=6 X 0.171=1.026

 Appendices 11 A
Calculation of Correlation Coefficient Between Loans & Advances & Total Deposits
SCBNL

F/Y LA (X) TDP (Y) X² Y² XY

2009/10 15956.96 35182.72 0 0 0
2010/11 18427.27 37999.24 0 0 0
2011/12 19575.97 35965.63 0 0 0
2012/13 22828.84 39466.45 0 0 0
2013/14 25976.58 46298.53 0 0 0
0 0 0 0 0

We Have,

N=5

∑ X = 104,134.30

∑ Y= 194,912.57

∑X2 = 2,231,706,415.62

∑Y2= 7,676,447,124.24

∑XY = 4,123,594,683.33

N ∑ XY −∑ X ∑ Y
r=
√ N ∑ X 2−( X )2 X √ N ∑ Y 2−(Y )2
5 X 4,123,594,683.33−104,134.30 X 194,912.57
r=
√ 5 X 2,231,706,415.62−(104,134.30) ² X √5 X 7,676,447,124.24−(194,912.57)2
320,889,378.50
r=
√ 314,579,641.61 X √391,325,677.20
1,252,544.23
r= =0.915
350,860,501.18

1−r ²
P . E .=0.6745 X
√N
1−(0.493)²
P . E .=0.6745 X
√5
P . E .=0.049

6 P . E .=6 X P . E .=6 X 0.049=0.294

 Appendices 11 B
Calculation of Correlation Coefficient Between Loans & Advances & Total Deposits
HBL

F/Y LA (X) TDP (Y) X² Y² XY

2009/10 27980.63 37611.2 0 0 0
2010/11 31566.98 40920.63 0 0 0
2011/12 34965.43 47730.99 0 0 0
2012/13 39723.81 53072.32 0 0 0
2013/14 45320.36 64674.85 0 0 0
0 0 0 0 0

We Have,

N=5

∑ X = 179,557.21

∑ Y= 244,009.99

∑X2 = 6,633,887,288.05

∑Y2= 12,366,855,104.12

∑XY = 9,052,382,610.43

N ∑ XY −∑ X ∑ Y
r=
√ N ∑ X 2−( X )2 X √ N ∑ Y 2−(Y )2
5 X 9,052,382,610.43−185,567.22 X 244,009.99
r=
√ 5 X 7,072,080,827.20−(179,557.21)² X √5 X 12,366,855,104.12−(244,009.99)2
1,448,160,035.62
r=
√ 928,644,777.27 X √ 2,293,400,300.80
1,448,160,035.62
r= =0.992
1,459,367,473.76

1−r ²
P . E .=0.6745 X
√N
1−(0.992) ²
P . E .=0.6745 X
√5
P . E .=0.005

6 P . E .=6 X P . E .=6 X 0.005=0.030

 Appendices 12 A
Calculation of Correlation Coefficient Between NPAT & Investment
SCBNL

F/Y NPAT (X) Investment (Y) X² Y² XY

2009/10 1085.87 19847.51 0 0 0
2010/11 1119.17 17258.68 0 0 0
2011/12 1168.97 12938.22 0 0 0
2012/13 1217.94 12753.52 0 0 0
2013/14 1336.59 9391.38 0 0 0
0 0 0 0 0

We Have,

N=5

∑ X = 5,928.54

∑ Y= 72,189.31

∑X2 = 7,067,996.68

∑Y2= 1,110,033,516.00

∑XY = 84,077,050.35

N ∑ XY −∑ X ∑ Y
r=
√ N ∑ X 2−( X )2 X √ N ∑ Y 2−(Y )2
5 X 84,077,050.35−5,928.54 X 72,189.31
r=
√ 5 X 7,067,996.68−(5,928.54)² X √5 X 1,110,033,516.00−(72,189.31)2
−7,591,960.16
r=
√ 192,396.87 X √ 338,871,101.72
−7,591,960.16
r= =−0.940
8,074,511.67

1−r ²
P . E .=0.6745 X
√N
1−(0.493)²
P . E .=0.6745 X
√5
P . E .=0.035
 6 P . E .=6 X P . E .=6 X 0.035=0.210

Appendices 12 B
Calculation of Correlation Coefficient Between NPAT & Investment
HBL

F/Y NPAT(X) Investment (Y) X² Y² XY

2009/10 508.8 8444.91 0 0 0
2010/11 893.12 8769.94 0 0 0
2011/12 958.64 10031.58 0 0 0
2012/13 943.7 12992.04 0 0 0
2013/14 959.11 19842.06 0 0 0
0 0 0 0 0

We Have,

N=5

∑ X = 4,263.37

∑ Y= 60,080.53

∑X2 = 3,785,993.10

∑Y2= 811,361,398.21

∑XY = 53,037,359.19

N ∑ XY −∑ X ∑ Y
r=
√ N ∑ X 2−( X )2 X √ N ∑ Y 2−(Y )2
5 X 53,037,359.19−4,263.37 X 21,061.92
r=
√ 5 X 3,785,993.10−(4,263.37)² X √5 X 811,361,398.21−( 60,080.53)2
9,041,266.76
r=
√ 753,641.74 X √ 447,136,905.97
9,041,266.76
r= =0.493
4,904,242.80

1−r ²
P . E .=0.6745 X
√N
1−(0.493)²
P . E .=0.6745 X
√5
P . E .=0.228
6 P . E .=6 X P . E .=6 X 0.228=1.368

Appendices 13 A
Trend Analysis on Loans & Advances SCBNL

Year X Total Loans (Y) X2 XY

2009/10 1 15956.96 0 0
2010/11 2 18427.27 0 0
2011/12 3 19575.97 0 0
2012/13 4 22828.84 0 0
2013/14 5 25976.58 0 0
0 0 0 0

N ∑ XY −∑ X ∑ Y 5 X 332,737.67−15 X 102,765.62
b= 2
= =2,444.08
N ∑ X −(∑ X ) ² 5 X 55−(15) ²

∑ Y −b ∑ X 102,765.62−2,444.08 X 15
a= = =13,220.88
N 5

Trend Analysis Yon X is given by

Y= a + bX

Trend Analysis for 2014/15

Y = 13,220.88+2,444.08 x 6 = 27,885.36
Trend Analysis for 2015/16
Y = 13,220.88+2,444.08 x 7 = 30,329.44
Trend Analysis for 2016/17
Y = 13,220.88+2,444.08 x 8 = 32,773.52
Trend Analysis for 2017/18
Y = 13,220.88+2,444.08 x 9 = 35,217.60
Trend Analysis for 2018/19
Y = 13,220.88+2,444.08 x 10 = 37,661.68

Appendices 13 B
Trend Analysis on Total Loans & Advances HBL
Year X Total Advances (Y) X2 XY
2009/10 1 27980.63 0 0
2010/11 2 31566.98 0 0
 2011/12 3 34965.43 0 0
2012/13 4 39723.81 0 0
2013/14 5 45320.36 0 0
0 0 0 0
N ∑ XY −∑ X ∑ Y 5 X 581,507.92−15 X 179,557.21
b= = =4,283.63
N ∑ X 2−(∑ X ) ² 5 X 55−(15)²
∑ Y −b ∑ X ² 179,557.21−4,283.63 X 15
a= = =23,060.55
N 5

Trend Analysis Yon X is given by

Y= a + bX

Trend Analysis for 2014/15

Y = 23,060.55+4,283.63 x 6 = 48,762.33
Trend Analysis for 2015/16
Y = 23,060.55+4,283.63 x 7 = 53,045.96
Trend Analysis for 2016/17
Y = 23,060.55+4,283.63 x 8 = 57,329.59
Trend Analysis for 2017/18
Y = 23,060.55+4,283.63 x 9 = 61,613.22
Trend Analysis for 2018/19
Y = 23,060.55+4,283.63 x 10 = 65,896.85

Appendices 14 A
Trend Analysis on Total Deposits SCBNL
Year X Total Deposits (Y) X2 XY
2009/10 1 35182.72 0 0
2010/11 2 37999.24 0 0
2011/12 3 35965.63 0 0
2012/13 4 39466.45 0 0
2013/14 5 46298.53 0 0
0 0 0 0

N ∑ XY −∑ X ∑ Y 5 X 608,436.54−15 X 194,912.57
b= 2
= =2,369.88
N ∑ X −(∑ X ) ² 5 X 55−(15) ²

∑ Y −b ∑ X ² 194,912.57−2,369.88 X 15
a= = =31,872.87
N 5
Trend Analysis Yon X is given by
Y =a+bX
Trend Analysis for 2014/15
Y = 31,872.87+2,369.88 x 6 = 46,092.15
Trend Analysis for 2015/16
Y = 31,872.87+2,369.88 x 7 = 48,462.03
Trend Analysis for 2016/17
Y = 31,872.87+2,369.88 x 8 = 50,831.91

Trend Analysis for 2017/18

Y = 31,872.87+2,369.88 x 9 = 53,201.79

Trend Analysis for 2018/19

Y = 31,872.87+2,369.88 x 10 = 55,571.67

Appendices 14 B
Trend Analysis on Total Deposits HBL
Year X Total Deposits (Y) X2 XY
2009/10 1 37611.2 0 0
2010/11 2 40920.63 0 0
2011/12 3 47730.99 0 0
2012/13 4 53072.32 0 0
2013/14 5 64674.85 0 0
0 0 0 0

N ∑ XY −∑ X ∑ Y 5 X 798,308.96−15 X 244,009.99
b= = =6,627.90
N ∑ X 2−(∑ X )² 5 X 55−(15) ²

∑ Y −b ∑ X 244,009.99−6,627.90 x 15
a= = =28,918.30
N 5
Trend Analysis Yon X is given by
Y =a+bX
Trend Analysis for 2014/15
Y = 28,918.30+6,627.90 x 6 = 68,685.70
Trend Analysis for 2015/16
Y = 28,918.30+6,627.90 x 7 = 75,313.60
Trend Analysis for 2016/17
Y = 28,918.30+6,627.90 x 8 = 81,941.50
Trend Analysis for 2017/18
Y = 28,918.30+6,627.90 x 9 = 88,569.40
Trend Analysis for 2018/19
Y = 28,918.30+6,627.90 x 10 = 95,197.30
 BALANCE SHEET OF SCBNL (2009/10 TO 2013/14)

Capital & 2009/10 2010/11 2011/12 2012/13 2013/14

Liabilities
Share Capital 1608256140 1610168000 1851693200 2039290000 2245839200
Reserve & Funds 1761453304 2067609062 2270475759 2578284225 2842251698
Debenture &
0- - - - -
Bonds
Borrowings - 350000000 0 - -
Deposits 35182721454 37999242310 35965630744 39466453239 46298532040
Bills Payable 89219655 65966151 86378524 49540914 67439885
Proposed Dividend 769165980 805084000 724575600 741560000 847293880
Income Tax
- - - 0 -
Liabilities
Other Liabilities 802503393 912450141 778298533 755971964 1022745469
Total Liabilities 0 0 0 0 0
Assets 2009/10 2010/11 2011/12 2012/13 2013/14
Cash Balance 509031174 610690895 509677917 687680696 613768499
Balance with NRB 819508706 1638276594 4833920464 4588269872 6862452256
Balance with
600766640 726827789 1022634688 1129048214 1712083452
Banks
Money at Call &
1669460000 4280888000 2126035000 3009064000 7960305000
Short Notice
Investment 19847511025 17258682472 12938215774 12753518240 9391378664
Loans, Advances
15956955268 18427270491 19575968330 22828838456 25976584629
& Bills Purchased
Fixed Assets 118539974 106071182 89633207 81518150 68725873
Non Banking
- - - - -
Assets
Other Assets 691547139 761812241 580966980 553162714 738803799
Total Assets 0 0 0 0 0