Impact of Liquidity on Profitability of Commercial Banks in Nepal

(With Reference to EBL & HBL)

A Dissertation submitted to the Office of the Dean, Faculty of Management in partial

fulfillment of requirement for the Master’s Degree

By:

Kamal Prasad Pudasaini

Symbol No: 20074/2019

T.U. Regd. No: 7-2-371-9-2007

Madhyabindu Multiple Campus

Kawasoti, Nawalpur

April, 2024
 Certificate of Authorship

I hereby corroborate that I have researched and submitted the final draft of dissertation
entitled “Impact of Liquidity on Profitability of Commercial Banks in Nepal (With
Reference to EBL & HBL)”. The work of this dissertation has not been submitted
previously for the purpose of conferral of any degrees nor it has been proposed and
presented as part of requirements for any other academic purposes.

The assistance and cooperation that I have received during this research work has been
acknowledged. In addition, I declare that all information sources and literature used are
cited in the reference section of the dissertation.

…………….

Kamal Prasad Pudasaini

April, 2024

ii
 Report of Research Committee
Mr. Kamal Prasad Pudasaini has defended research proposal entitled "Impact of
Liquidity on Profitability of Commercial Banks in Nepal (With Reference to EBL
& HBL)" successfully. The research committee has registered the dissertation for
further progress. It is recommended to carry out the work as per suggestions and
guidance of supervisor Prof. Bishnu Prasad Lamsal, PhD and submit the thesis for
evaluation and viva voce examination.

Prof. Bishnu Prasad Lamsal, PhD

Position: Dissertation Supervisor
Dissertation Proposal Defended Date:
Signature: ………………………………….
………………………………….

Prof. Bishnu Prasad Lamsal, PhD

Dissertation Submitted Date:
Position: Dissertation Supervisor
………………………………..
Signature: ………………………………….

Head of Research Committee

Prof. Bishnu Prasad Lamsal, PhD Dissertation Viva Voce Date:

Signature: …………………………………. ……………………………

iii
 Approval Sheet

We have examined the dissertation entitled " “Impact of Liquidity on Profitability of

Commercial Banks in Nepal (With Reference to EBL & HBL)” Presented by Mr.
Kamal Prasad Pudasaini for the degree of Master of Business Studies. We hereby
certify that the dissertation is acceptable for the award of degree.

………………………
Prof. Bishnu Prasad Lamsal, PhD
Dissertation Supervisor

………………………

Internal Examiner

………………………
External Examiner

………………………

Chairperson, Research Committee

…………………………………

Ganeshman Giri

Campus Chief

iv
 Acknowledgements

First of all , I would like to extend my deepest gratitude to my dissertation supervisor,

Prof. Bishnu Prasad Lamsal, PhD, whose unwavering support, guidance, and invaluable
insights have been the cornerstone of this research journey. Your expertise, patience,
and commitment to excellence have not only shaped this dissertation but have also
inspired me to strive for academic and research excellence.

I am profoundly thankful to the management faculty and staffs of Madhyabindu

Multiple Campus for fostering an environment of academic rigor and research
excellence. Your support have provided me with the necessary academic foundation
and resources to undertake this study. Your encouragement and scholarly guidance
have played a pivotal role in my academic growth and development.

I express my heartfelt appreciation to my spouse Mrs. Mamata Basnet Pudasaini and

other family members who have been my constant pillars of strength throughout my
academic journey. Your unwavering encouragement and support have been
instrumental in keeping me motivated during the challenging yet rewarding phases of
this research endeavor. Your belief in me has fueled my determination to overcome
obstacles and achieve academic success.

Special gratitude goes to all those individuals who generously shared their time,
insights, and expertise, contributing to the richness and depth of this study. Your
valuable contributions have significantly enhanced the quality and scope of this
research project, and I am sincerely grateful for your collaboration and support.

Kamal Prasad Pudasaini

v
 Table of Contents

Title Page i
Certification of Authorship ii
Report of Research Committee iii
Approval Sheet iv
Acknowledgements v
Table of Contents vi
List of Tables viii
List of Figures ix
Abbreviations x
Abstract xi

Chapter I : Introduction 1
Background of the Study 1
Problem Statement 4
Objectives of the Study 5
Rationale of the Study 6
Limitations of the Study 7

Chapter II : Literature Review 8

Conceptual Review 8
Liquidity 8
Measurement of Liquidity 9
Liquidity Risk 10
Profitability 11
Measurement of Profitability 12
Liquidity and of Profitability 13
Theoretical Review 14
Liability Management Theory 14
Liquidity Preference Theory 15
Shiftability Theory 16
Anticipated Income Theory 17
Empirical Review 18
Review of Literature Before 2000 18
Review of Literature After 2000 19
Research Gap 24

Chapter III: Research Methodology 26

Research Design 26
Population and Sample, and Sampling Design 26

vi
 Nature and Sources of Data and the Instrument of Data Collection 27
Method of Analysis 27
Financial Tools 28
Statistical Tools 31
Research Framework and Definition of Variables 34
Research Framework 34
Operational Definition of Variables 35

Chapter IV: Results and Discussion 38

Results 38
Descriptive Statistics 38
Correlation Analysis 42
Regression Analysis 44
Major Findings 51
Discussion 53

Chapter V: Summary and Conclusion 55

Summary 55
Conclusion 58
Implications 60
Theoretical Implications 61
Practical Implications 61
References
Appendices

vii
 List of Tables

Tables Page No.

Table 1 Summary of Data 39

Table 2 Summary of Descriptive Statistics 40

Table 3 Correlation Matrix 43

Table 4 Model Summary of Regression Model I 45

Table 5 ANOVA Table of Regression Model I 46

Table 6 Beta Coefficient of Regression Model I 46

Table 7 Model Summary of Regression Model II 48

Table 8 ANOVA Table of Regression Model II 49

Table 9 Beta Coefficient of Regression Model II 49

viii
 List of Figures

Figure Page No.

Figure 1 Research Framework of this study 34

ix
 Abbreviations

ANOVA : Analysis of Variances

C.V. : Coefficient of Variation

CDR : Cash in Hand to Total Deposit Ratio

CRR : Cash Reserve Ratio

CTR : Current Asset to Total Asset Ratio

CUR : Current Ratio

EBL : Everest Bank Ltd.

FY : Fiscal Year

HBL : Himalayan Bank Ltd.

LDR : Loan & Advance to Deposit Ratio

NDR : NRB Balance to Total Deposit Ratio

NRB : Nepal Rastra Bank

ROA : Return on Assets

ROE : Return on Equity

S.D. : Standard Deviation

US : United States of America

VIF : Variance Inflation Factor

WCM : Working Capital Management

x
 Abstract

This study examines the relationship between liquidity and profitability in Commercial
Bank in Nepal, aiming to address gaps in existing literature and provide insights for
strategic decision-making. The research problem revolves around understanding how
liquidity management impacts profitability in the context of Nepalese banking. The
main objective is to analyze the relationship between liquidity metrics and profitability
measures to inform effective financial management strategies.

The research design entails a quantitative approach with descriptive as well as causal
comparative research design, utilizing secondary data from the published annual
reports of Everest Bank Ltd. and Himalayan Bank Ltd. from fiscal years 2013/14 to
2022/23. The population comprises all 20 commercial banks operating in Nepal, with
a sample consisting of the two selected Commercial Bank chosen via simple random
sampling. Statistical tools such as descriptive statistics, correlation analysis, and
regression analysis are employed for data analysis. Financial tools utilized in the study
include various financial ratios.

The analysis of the relationship between liquidity and profitability indicates various
correlations among liquidity metrics and profitability measures. The LDR shows a
weak negative correlation with both ROA and ROE, implying that a decrease in LDR
is linked to reduced profitability. Conversely, the CRR, NDR, and CTR demonstrate
weak to moderate positive correlations with profitability. However, the CUR exhibits a
strong negative correlation with both ROA and ROE. The CDR shows a strong positive
correlation with profitability. While certain liquidity ratios show potential impacts on
profitability, their statistical significance is limited, suggesting that other factors may
also influence profitability in Commercial Bank in Nepal.

Practically, the study offers insights for Commercial Bank in Nepal to enhance their
liquidity management strategies, thereby improving profitability. Theoretical
implications contribute to understanding the nuances of liquidity and profitability
dynamics in Nepalese banking. Recommendations include implementing effective
liquidity management practices and considering various factors affecting profitability
for strategic decision-making.

Keywords: Liquidity, Profitability, Commercial Bank, Nepal, Financial Management

xi
 Chapter I
Introduction

Background of the Study

Liquidity, at its core, denotes the immediate capability to fulfill financial obligations.
Its management encompasses two primary dimensions: firstly, the ability to swiftly
trade various assets at prevailing market prices; and secondly, the strategic
maneuvering employed by financial institutions to meet cash and collateral
requirements without incurring significant losses. This multifaceted approach, as
outlined by Shrestha (2012), underscores the crucial balance between asset flexibility
and risk mitigation inherent in effective liquidity management strategies.

Liquidity management is a crucial aspect of financial decision-making for

organizations, particularly in commercial banks. It involves optimizing the balance
between profitability and liquidity to ensure smooth operations and meet short-term
financial obligations efficiently. Efficient liquidity management enables organizations
to have sufficient cash or readily convertible assets to cover immediate liabilities,
thereby safeguarding against unexpected losses and ensuring financial stability.
Achieving this balance requires strategic decision-making by management to allocate
resources effectively while considering the potential trade-offs between profitability
and liquidity (Lukorito et al., 2014).

In the banking sector, liquidity is paramount for meeting daily operational requirements
and fulfilling obligations such as withdrawals, investments, and loan disbursements.
Banks play a pivotal role in intermediating between depositors with surplus funds and
investors seeking capital for various ventures. While profitability is a key indicator of
a bank's success, excessive focus on profitability without adequate attention to liquidity
can pose risks to the institution's financial health. Banks must strike a delicate balance
between maintaining sufficient liquidity levels to meet short-term commitments and
maximizing profitability through prudent lending and investment activities (Ibrahim,
2017).

Effective liquidity management stands as a cornerstone for maintaining the financial

stability and operational prowess of banking institutions. It involves a strategic
approach geared towards balancing liquidity levels in the market to safeguard the bank's
 2

profitability and daily operations, as highlighted by Ismail (2016). Central to this

endeavor is the meticulous assessment of prevailing liquidity conditions within the
banking system and the bank's specific liquidity requirements. By discerning these
needs, banks can judiciously allocate liquidity resources, injecting or withdrawing
funds from the market as needed. This adept management ensures the fulfillment of
short-term reserve obligations while preserving revenue-generating activities.
Regulatory frameworks, typically set by the central bank, delineate the liquidity
standards for banks, guiding their management efforts. Through vigilant oversight and
proactive liquidity management, banks can bolster their financial resilience and
contribute to the seamless functioning of the broader financial ecosystem, as
emphasized by Akinwumi et al. (2017).

In finance, liquidity holds substantial significance as it represents the accessibility of

capital for investment, primarily in the form of credit rather than physical cash, as noted
by Bhunia and Khan (2011). For banks specifically, liquidity pertains to their ability to
maintain adequate funds to fulfill imminent financial obligations, such as cash
withdrawals and check payments, while adhering to reserve requirements, as outlined
by Priya and Nimalathasan (2013). Liquidity can be understood as the ease with which
assets can be converted into cash or sold at fair market prices. Effective liquidity
management is crucial for banks to meet immediate financial commitments efficiently
(Nwaezeaku, 2006).

Following the global financial crisis, obtaining business financing has become
increasingly challenging for managers, necessitating effective strategies. Tightening
constraints in local and international financial markets, coupled with reluctance from
the public to invest in company shares post-market crash, have made bank loans costlier
and more difficult to secure (Bashir, 2001). In response, business managers are
compelled to explore alternative approaches to manage internally generated revenue,
aiming to maximize profitability and meet shareholder expectations. This shift towards
internal revenue management signifies a move towards self-sustainability and
resilience amidst unpredictable market conditions. Through the development and
implementation of robust financial strategies, businesses can navigate financing
complexities and position themselves for long-term success, ensuring profitability and
stakeholder satisfaction (Samuel & Abdulateef, 2016).
 3

Profitability serves as a critical measure of a company's financial performance,

indicating the extent to which revenues surpass relevant expenses, as highlighted by
Khati (2020). Profitability ratios play a pivotal role in assessing management's ability
to generate earnings from revenue-generating activities. Two commonly used ratios are
the gross profit margin and net profit margin. The gross profit margin reveals the profit
earned in relation to the cost of sales, offering insights into profitability before
accounting for other expenses (Lamichhane, 2022). On the other hand, the net profit
margin reflects the net profit earned per unit of turnover, considering various expenses
including administration and distribution costs. Maintaining robust profitability ratios
is essential for businesses to ensure financial viability, create shareholder value, and
foster long-term growth (Keeley, 1990).

Despite the allure of high profitability, banks must exercise caution to avoid
compromising their liquidity position. Holding excess cash reserves beyond operational
requirements can hinder profitability by missing out on potential investment and
lending opportunities, thereby reducing revenue generation. Therefore, maintaining a
harmonious equilibrium between liquidity and profitability is essential for the long-
term sustainability and resilience of banks, ensuring they can navigate through
economic fluctuations and unforeseen challenges while continuing to serve the
financial needs of their stakeholders effectively (Paul et al., 2021).

Profitability ratios serve as crucial metrics indicating a company's ability to generate

profits from its sales, offering valuable insights into management effectiveness and the
company's resilience in the face of challenges, as highlighted by Jarvis et al. (1996).
These ratios play a significant role in attracting potential investors, particularly those
interested in dividends and potential market value appreciation of the company's stock.
For managers, profitability ratios are essential for assessing operational performance
and overall profitability, with a decline in profit margins potentially raising concerns
about management efficiency and investor confidence, as noted by Owolabi and Obida
(2012). By diligently monitoring and maintaining favorable profitability ratios,
companies can demonstrate their capacity for sustainable profit generation, enhancing
investor confidence and competitiveness in the market.

In the realm of commercial banking, managers grapple with critical decisions regarding
liquidity management, particularly in balancing deposit and loan balances, as
emphasized by Hameed et al. (2021). Liquidity is crucial not only for individual banks
 4

but also for the stability of the entire financial system, as insufficient liquidity in one
bank can have systemic repercussions. Therefore, banks must strike a balance between
maintaining adequate liquidity and maximizing investment opportunities. While higher
liquidity levels ensure the ability to meet short-term obligations and mitigate risks, they
may entail the opportunity cost of potentially missing out on higher returns from
alternative investments. Hence, bank managers must carefully assess and manage
liquidity, considering both immediate needs and long-term benefits of deploying excess
liquidity into more profitable avenues. Achieving an optimal liquidity position is
essential for ensuring financial stability and overall performance in the dynamic
banking landscape, as highlighted by Kamau (2009).

In the banking sector of Nepal, the occurrence of deposit run-offs during specific events
poses a significant liquidity risk, as described by Shrestha (2018). Nepalese banks
employ various data sources, including historical data and industry data from past stress
events, to evaluate and address liquidity risks. Adjustments are often made to account
for potential limitations in capturing depositor behavior during stress events based
solely on historical data. Factors such as customer relationships, insured deposit
proportions, balance sheet composition, and crisis duration influence the magnitude of
deposit outflows during stress scenarios, as noted by Sthapit and Maharjan (2012).
Effective liquidity risk management is critical for Nepalese banks to ensure stability
and resilience in adverse situations, safeguarding the interests of depositors and the
overall financial system. This study focuses on exploring liquidity management and its
relationship with the profitability of Commercial Bank in Nepal.

Problem Statement

The management of liquidity and profitability stands as critical factors that profoundly
impact a corporation's overall progress, endurance, sustainability, expansion, and
effectiveness. It's essential to recognize that while profitability is significant, it doesn't
inherently guarantee liquidity, and even profitable companies may face liquidity
challenges. Hence, effective liquidity management becomes vital to achieving an
optimal balance. Excessive liquidity can foster complacency and stifle innovation,
while inadequate liquidity may hinder meeting short-term obligations. Through prudent
liquidity management, companies can maintain an appropriate level to support their
financial health, operational efficiency, and ability to seize growth opportunities while
fulfilling financial commitments. Although liquidity's significance in business
 5

efficiency is undeniable, scholarly research has often overlooked this aspect. However,
a few noteworthy studies, such as Gupta (1969) and Ben-Caleb et al. (2013), have
explored variations in average financial ratios across different industries, providing
insights into diverse liquidity management practices.

In Nepal, commercial banks are confronted with the imperative of bolstering their
liquidity positions to ensure survival and sustained operations amidst constraints on
cash flow and credit availability. Acknowledging the pivotal role of working capital as
the foundation of their operations, Nepalese commercial banks must prioritize effective
liquidity management (Pokharel, 2019). This entails making short-term decisions
concerning working capital, financing short-term assets and liabilities to ensure
adequate cash flow for meeting debt obligations and operational expenses. Proactive
liquidity management can strengthen the resilience of Nepalese banks, enhance their
financial stability, and secure the necessary resources to sustain operations, thereby
contributing to the country's economic growth (Khati, 2020). Despite receiving limited
attention in academic literature, the importance of liquidity in driving business
performance underscores the necessity for further research in this domain. The study
aimed to address the following inquiries:

1. What is the status of liquidity and profitability of Everest Bank Ltd. (EBL) and
Himalayan Bank Ltd. (HBL)?
2. Is there any relationship of liquidity on the profitability of Everest Bank Ltd.
(EBL) and Himalayan Bank Ltd. (HBL)?
3. What is the impact of liquidity on the profitability of Everest Bank Ltd. (EBL)
and Himalayan Bank Ltd. (HBL)?

Objectives of the Study

The primary aim of this study is to analyze the influence of liquidity on the profitability
of Commercial Bank operating in Nepal, focusing particularly on Everest Bank Ltd.
and Himalayan Bank Ltd. By examining the relationship between liquidity metrics and
profitability indicators, this research seeks to provide insights into how the liquidity
positions of these banks impact their financial performance. Understanding the
dynamics between liquidity and profitability is crucial for stakeholders, including
investors, regulators, and bank management, as it can inform strategic decision-making
and risk management practices. Through a comprehensive analysis of data and
 6

statistical methods, this study aims to contribute to the existing body of knowledge on
banking operations in Nepal and provide practical implications for enhancing the
financial performance and stability of Commercial Bank in the country. Following is
the research objective of this study.

1. To examine the status of liquidity and profitability of Everest Bank Ltd. (EBL)
and Himalayan Bank Ltd. (HBL).
2. To explore the relationship of liquidity and profitability of Everest Bank Ltd.
(EBL) and Himalayan Bank Ltd. (HBL).
3. To analyze the impact of liquidity on the profitability of Everest Bank Ltd.
(EBL) and Himalayan Bank Ltd. (HBL).

Rationale of the Study

The study holds significant relevance and rationale for various stakeholders involved
in the following banking sector and academia.

 Commercial Banks: For all commercial banks in Nepal, regardless of their

ownership structure, this study offers valuable insights into liquidity-
profitability dynamics. By examining this relationship, banks can refine their
liquidity management practices to optimize profitability while maintaining
adequate liquidity buffers to meet regulatory requirements and customer
demands.
 Management: Bank management teams will benefit from this study as it sheds
light on the effectiveness of their liquidity management strategies and their
impact on profitability. The findings can inform management decisions
regarding liquidity risk management, asset allocation, and funding strategies to
maximize profitability and minimize risk.
 Government and Policymakers: The government and policymakers in Nepal
can use the findings of this study to formulate or refine banking regulations and
policies related to liquidity management. Understanding how liquidity
influences profitability can aid in designing regulatory frameworks that promote
financial stability while fostering a conducive environment for banking sector
growth.
 Investors: Investors, including shareholders and potential investors in
Commercial Bank, can use the study's findings to assess the financial health and
 7

performance of these banks. Insights into liquidity-profitability dynamics can

inform investment decisions, helping investors evaluate the potential risks and
returns associated with investing in these banks.
 Researchers: Academics and researchers in the field of banking and finance
will find value in this study as it contributes to the existing body of knowledge
on liquidity management and profitability in commercial banks. The study may
inspire further research into related topics, such as the impact of regulatory
changes on liquidity risk or the role of technology in liquidity management.
 Students: Lastly, students pursuing studies in banking, finance, or economics
can benefit from this study by gaining a deeper understanding of the practical
implications of liquidity management in commercial banks. The study can serve
as a valuable case study for classroom discussions, assignments, or research
projects, helping students develop analytical skills and critical thinking abilities
relevant to the banking industry.

Limitations of the Study

i. Reliance on secondary data sources may introduce potential inaccuracies and

reliability issues.
ii. Analysis is restricted to a specific timeframe from FY 2013/2014 to 2022/2023,
possibly limiting generalizability to different economic conditions or time
periods.
iii. Focus only on two commercial banks may not fully represent the diversity of
the banking sector in Nepal.
iv. The scope concentrating solely on the relationship between liquidity
management and profitability overlooks other influential factors.
v. Little of consideration for external elements like regulatory changes, economic
fluctuations, or market conditions may impact the study's validity.
 Chapter II
Literature Review

This chapter provides a comprehensive overview of the existing literature relevant to

the study, covering conceptual, theoretical, and empirical perspectives. The conceptual
review examines key concepts and definitions related to the research topic, providing a
foundation for understanding the theoretical framework. The theoretical review
explores theoretical models, frameworks, and hypotheses proposed by scholars to
explain the phenomenon under investigation. Additionally, the empirical review
synthesizes findings from previous research studies, highlighting empirical evidence
and trends in the field. Finally, the chapter identifies research gaps and areas for further
investigation, setting the stage for the current study to contribute to the existing body
of knowledge.

Conceptual Review

In this section, a conceptual review of liquidity and profitability within the context of
Nepalese commercial banks is presented. Liquidity refers to the ability of a bank to
meet its short-term financial obligations without incurring significant losses. It
encompasses the availability of liquid assets and the ability to convert assets into cash
quickly. Profitability, on the other hand, assesses the bank's ability to generate earnings
relative to its resources and operational activities. It reflects the effectiveness of the
bank's business model, management practices, and market positioning. By examining
the conceptual frameworks and definitions of liquidity and profitability specific to
Nepalese commercial banks, this section provides a foundational understanding of
these key financial metrics within the context of the study.

Liquidity

Liquidity holds paramount importance in ensuring the smooth and effective operations
of banks, with researchers offering various definitions to encapsulate its essence. From
an accounting standpoint, liquidity refers to a company's ability to settle short-term
debts within a year. A broader interpretation encompasses three vital components: the
quantity of resources available to meet financial obligations, the time required to
convert assets into cash, and associated costs. Additionally, liquidity denotes a
 9

company's capacity to enhance future cash flows to address unforeseen needs or seize
unexpected opportunities (Vodova, 2011).

In the banking sector, liquidity is defined as the ability to obtain necessary funding
through attracting deposits, holding cash, or pledging encumbered assets.
Understanding liquidity entails considerations of financial instrument liquidity, which
pertains to the ease of converting assets into cash without loss of value, market liquidity,
which focuses on the ability to trade securities without affecting their prices, and
monetary liquidity, which deals with the quantity of fully liquid assets in the financial
domain (Zaharum et al., 2022).

Solvency, closely associated with liquidity, gauges the extent to which a company's
assets surpass its liabilities (Vodova, 2011). This assessment often involves ratios such
as current ratios, quick ratios, and the concept of net working capital. In the banking
sector, where efficient fund management and meeting short-term obligations are
imperative, a nuanced understanding of liquidity becomes crucial. The multifaceted
nature of liquidity, encompassing dimensions like time, cost, and market dynamics,
underscores its pivotal role in sustaining the financial health of banks (Shrestha, 2018).

Measurement of Liquidity

Assessing liquidity involves the evaluation of several indicators, with a primary

emphasis on working capital, which represents the cash necessary for a company's day-
to-day operations. Gross working capital encompasses current assets, while net working
capital is the difference between current assets and liabilities, including cash, short-
term financing, receivables, inventory, payables, and prepaid expenses (Charmler et al.,
2018).

Working Capital Management (WCM) becomes a critical consideration for financial

managers, encompassing cash flow management, inventory management, trade
receivable management, and short-term finance. Effective WCM is vital for financial
management and is closely linked to sales growth. Financial managers must strike a
balance in controlling working capital, as both excess and insufficient working capital
can harm profit maximization. Risks associated with inefficient fund utilization include
heightened supervision needs, bad debt loss, and low profitability with excessive
working capital, while inadequate working capital may lead to operational
 10

interruptions, reputation damage, and missed opportunities (Mandal & Goswami,

2010).

Net working capital theoretically implies higher liquidity for a company as it represents
the difference between current assets and liabilities. Cash flow from operations serves
as a direct measure of liquidity, reflecting the company's ability to generate positive
cash flow to meet liquidity needs. Cash Conversion Efficiency (CCE) indicates a
company's efficiency in converting revenues into cash flow from operations. The Cash
Conversion Period, incorporating Days Inventory Held (DIH), Daily Sales Outstanding
(DSO), and Days Payment Outstanding (DPO), offers insight into a company's liquidity
cycle (Quayyum, 2011).

The Cash Conversion Cycle (CCC) combines factors like DSO, Days Inventory
Outstanding (DIO), and DPO. Additionally, quantitative ratios such as the Current
Ratio and Quick Ratio are commonly used to measure liquidity. The Current Ratio
assesses the capacity of current assets to cover current liabilities, while the Quick Ratio
excludes inventory due to its lower liquidity compared to other current assets. In the
banking sector, ratios like the Loan to Deposit Ratio (LDR), Deposit to Asset Ratio
(DAR), and Cash & Cash Equivalent Ratio are employed to gauge liquidity. These
ratios offer insights into a bank's liquidity position and its ability to meet financial
obligations through various financial instruments (Quayyum, 2011).

Overall, assessing liquidity involves a multi-faceted approach, considering various

indicators and ratios to comprehensively evaluate a company's or a bank's ability to
meet short-term obligations and effectively manage its financial resources (Charmler et
al., 2018).

Liquidity Risk

Liquidity risk stands as a pivotal concern in upholding the stability of financial systems,
as its absence can lead to a bank's inability to meet its financial obligations, particularly
during unexpected emergency scenarios such as financial crises or economic shocks.
The repercussions of liquidity risk were starkly evident during the 2008 global financial
crisis, where commercial banks grappled with difficulties in fulfilling payment needs
using cash or cash-equivalent instruments. From a market standpoint, liquidity risk is
characterized by the inability to offset or unwind a position without impacting its price
(Strahan, 2012).
 11

For banks, liquidity risk is intricately intertwined with various risk factors, including
credit risk, reputation risk, market risk, and concentration risk, all of which collectively
contribute to the emergence of liquidity risk. For instance, reputation risk can escalate
funding costs, thereby exacerbating liquidity risk for banks. Effectively understanding
and managing these interconnected risks are imperative for banks to effectively
navigate the complexities of liquidity challenges (Kumar & Yadav, 2013).

The sources of liquidity risk can be classified into three primary groups: systematic
sources, individual sources, and technical sources (timing sources). Systematic sources
stem from external factors that generate unavoidable liquidity risks, such as market
disruptions. Individual sources arise from bank-specific factors like reputation damage
or losses. Technical sources, or timing sources, result from mismatches in the timing of
liquidity asset inflows and outflows. Arif and Nauman (2012) outline ten main liquidity
risks, including wholesale funding risk, retail funding risk, intraday liquidity risk,
intragroup liquidity risk, cross-currency liquidity risk, off-balance sheet liquidity risk,
funding concentration risk, assets risk, funding cost risk, and correlation risk.

Effectively managing liquidity risk necessitates a comprehensive understanding of

these various sources and risks. Banks must deploy strategies to address each liquidity
risk category to bolster their resilience and uphold financial stability amidst unforeseen
challenges (Kumar & Yadav, 2013). Through the identification, assessment, and
mitigation of liquidity risks, financial institutions can safeguard their operations and
contribute to the overall stability of the financial system.

Profitability

Profitability, a fundamental concept for banks, refers to the difference between revenue
generated from output sales and the full opportunity cost of factors used in production.
This definition highlights profitability's dual focus on revenues and costs, reflecting the
core objective of commercial banks to maximize profits. Achieving this objective
necessitates a nuanced approach involving revenue enhancement and cost management
strategies such as breakeven analysis, cost control measures, and ratio analysis (Ibe,
2013).

While profitability maximization is a common goal for commercial banks, its

realization is complex due to numerous variables. Tsomocos (2003) stresses the
prioritization of company survival over profitability. This underscores the crucial link
 12

between liquidity and profitability, emphasizing the need for effective liquidity
management. For companies seeking to boost profitability by increasing revenues,
prudent liquidity management is vital to capitalize on investment opportunities and
optimize available funds. Conversely, if cost control is the focus for wealth
maximization, effective liquidity management becomes equally critical to mitigate
additional costs resulting from a lack of profitability.

The intricate relationship between liquidity and profitability is evident in the strategic
decisions made by commercial banks (Ibe, 2013). Improving profitability requires a
delicate balance between revenue enhancement and cost containment, with this balance
intricately linked to liquidity management. Prudent liquidity management enables
banks to navigate the dynamic financial environment, ensuring they have the requisite
resources to seize profitable opportunities and manage costs effectively. Thus,
profitability transcends mere financial metrics, becoming a strategic imperative
intertwined with liquidity management, shaping the long-term success and
sustainability of commercial banks.

Measurement of Profitability

Banks profitability is commonly evaluated based on two primary factors: stability,

which relates to risk exposure, and profitability, which concerns financial returns. In
quantifying profitability, accounting ratios have emerged as indispensable tools
(Figenbaum & Thomas, 1986). Among these ratios, Return on Assets (ROA) and
Return on Equity (ROE) are key metrics frequently utilized to assess banks'
profitability. Return on Assets (ROA) holds significant importance as it measures the
efficiency of utilizing total assets to generate profit. By dividing net income by total
assets, ROA provides insights into how effectively a bank employs its assets to yield
returns. A higher ROA indicates greater profitability for banks, reflecting enhanced
operational efficiency and financial performance.

On the other hand, Return on Equity (ROE) evaluates the efficiency of utilizing
shareholder equity to generate profit. This metric is crucial for shareholders as it
directly reflects their return on investment. Banks with higher ROE are generally
perceived as more profitable and promising by shareholders. ROE serves as a critical
gauge of how effectively a bank utilizes the funds contributed by its equity holders to
generate profits (Athanasoglou et al., 2008). In essence, ROA and ROE play pivotal
 13

roles in assessing banks' profitability, providing valuable insights into their operational
efficiency and ability to generate returns for shareholders. These ratios are fundamental
tools for stakeholders in evaluating the financial performance and overall health of
banks.

Liquidity and of Profitability

The relationship between liquidity and profitability is a complex and widely studied
topic in financial literature. Traditionally, researchers have often discussed this
relationship in the context of a trade-off, wherein higher liquidity levels are perceived
to potentially hinder profitability. This perspective stems from the modern portfolio
theory proposed by Markowitz (1991), which suggests that higher risk is associated
with higher profitability. However, efficient liquidity management can mitigate risk,
thereby enhancing the efficiency of investments and reducing costs associated with
liquidity shortages. This intricate interplay between risk, liquidity, and profitability
underscores the need for a nuanced understanding of their relationship.

While the trade-off theory is widely accepted, some researchers argue that efficient
liquidity management can actually contribute to improved profitability. They posit that
although current assets typically yield lower returns compared to fixed assets,
maintaining adequate liquidity can help companies avoid additional costs associated
with liquidity shortages. For instance, having sufficient liquidity reserves enables
companies to seize promising investment opportunities requiring immediate capital
injections and meet sudden financial needs stemming from cash flow mismatches.
Thus, these researchers advocate for a more positive relationship between liquidity and
profitability, emphasizing the strategic value of liquidity management in enhancing
overall financial performance.

Bordeleau and Graham (2010) delve into the relationship between bank liquidity and
profitability, particularly in the context of US and Canadian banks. Their findings
suggest that while liquidity assets may yield lower profits, increasing liquidity can
mitigate the costs associated with asset-liability mismatches, thereby positively
impacting profitability to a certain extent. However, they caution against excessive
liquidity holdings, which may lead to the inefficient allocation of funds and hinder
investment management. This nuanced perspective highlights the importance of
 14

striking a balance between liquidity and profitability to achieve optimal financial

performance.

Moreover, Bordeleau and Graham (2010) research underscores the relevance of their
findings within the framework of contemporary regulatory guidelines such as the Basel
Accord. While regulatory bodies mandate minimum liquidity reserves to safeguard
against financial crises, holding excess liquidity assets can pose challenges for banks in
terms of optimizing profitability. Consequently, financial managers face the intricate
task of determining the optimal liquidity threshold for their institutions to balance
regulatory compliance with wealth maximization objectives.

In light of these complexities, there is a growing call for further research to deepen our
understanding of the impact of liquidity on bank profitability across diverse geographic
contexts. This holistic approach is essential for developing comprehensive and
universally applicable insights into the intricate relationship between liquidity
management and financial performance. By conducting more studies in various regions,
researchers can elucidate nuanced dynamics and inform evidence-based strategies for
effective liquidity management in the pursuit of enhanced profitability.

Theoretical Review

This section delves into a theoretical review of several prominent theories relevant to
the study. The liability management theory focuses on the strategic management of a
bank's liabilities to optimize its financial position and minimize risks. Liquidity
preference theory explores the relationship between interest rates and the demand for
money, highlighting how individuals and firms balance the trade-offs between holding
liquid assets and earning interest. Shiftability theory posits that banks can manage
liquidity risk by shifting assets and liabilities between different maturities to match cash
inflows and outflows. Lastly, the anticipated income theory examines how expectations
of future income influence individuals' and firms' decisions regarding liquidity
management and investment choices. By reviewing these theories, this section provides
theoretical frameworks that underpin the analysis of liquidity and profitability
dynamics in Nepalese commercial banks.

Liability Management Theory

The Liability Management Theory, as formulated by Diamond and Rajan (2001),

centers on the concept of banks issuing liabilities to address liquidity requirements,
 15

highlighting the intricate relationship between liquidity and liability management. A

critical aspect of mitigating liquidity risk involves establishing an adequate level of
liquid assets. Asset and liability management, recognized as a significant risk
management strategy in banking, serves as a crucial decision-making framework aimed
at maximizing stakeholder value. It is essential to monitor market externalities within
the asset and liability management framework to ensure long-term sustainability and
readiness for adverse impacts. According to Goddard et al. (2009), analyzing the
banking sector can offer valuable insights into assessing the resilience of a country's
financial system.

Asset Liability Management encompasses monitoring changes across the entire balance
sheet, involving risk quantification and deliberate decisions regarding the asset-liability
structure to optimize interest earnings while considering perceived risks. The primary
objective is not risk elimination but effective risk management, minimizing short-term
risks to net interest income and safeguarding the organization's long-term economic
value. The Liability Management Theory focuses on managing risks related to net
income, net interest margin, capital adequacy, and liquidity while maintaining a
balanced relationship between profitability growth and risk (Diamond & Rajan, 2001).

Supporters of this theory contend that through effective Asset Liability Management,
banks can ensure the liquidity, profitability, and solvency of financial institutions. This
approach aids banks in managing and mitigating various risks, including credit risk,
liquidity risk, interest rate risk, and currency risk. Liabilities within a bank encompass
different categories with varying costs based on tenor and maturity patterns, comprising
various classes with diverse returns influenced by maturity and volatility factors. The
central principle of the theory lies in aligning liabilities and assets (Almeida et al.,
2014).

Liquidity Preference Theory

The Liquidity Preference Theory, a cornerstone concept in macroeconomics, was

developed by prominent economist John Maynard Keynes in his seminal work "The
General Theory of Employment, Interest, and Money," published in 1936. This theory
seeks to elucidate how interest rates are determined in financial markets based on
individuals' preferences for holding liquid assets such as cash over less liquid ones like
bonds (Tobin, 1947).
 16

Central to the Liquidity Preference Theory is the idea that individuals place a premium
on liquidity, which denotes the ease of converting an asset into cash. Keynes posited
that people generally prefer holding liquid assets to safeguard against uncertainty and
unforeseen financial needs. The theory posits that the demand for money stems from
three motives: the transaction motive, precautionary motive, and speculative motive.
The transaction motive pertains to the necessity of money for day-to-day transactions,
the precautionary motive involves holding money for unforeseen future expenses, and
the speculative motive entails holding money in anticipation of capitalizing on changes
in bond prices (Modigliani, 1944).

Furthermore, the Liquidity Preference Theory contends that the interest rate represents
the cost individuals are willing to bear for the convenience of holding money instead
of interest-bearing securities. Keynes argued that the interest rate serves as the
equilibrium between the supply of money and the demand for money. When individuals
seek to hold more money (heightened liquidity preference), interest rates increase,
whereas decreased demand for money (lower liquidity preference) results in lower
interest rates. This dynamic interplay between interest rates and liquidity preference is
instrumental in determining the overall level of economic activity (Tobin, 1947).

However, critics of the Liquidity Preference Theory have questioned its simplicity and
the assumption that individuals are motivated solely by liquidity concerns when making
financial decisions.

Shiftability Theory

The Shiftable Assets Theory suggests that banks can bolster their liquidity by
maintaining assets that can be readily shifted or sold to other lenders or investors for
cash. According to this theory, consistently holding assets that are easily marketable,
especially when central banks or discount markets are willing to purchase them, can
strengthen a bank's liquidity position. This perspective underscores the critical
importance of asset shiftability, marketability, and transferability in ensuring liquidity
(Prochnow, 1949).

This theory particularly emphasizes the significance of highly marketable securities in

a bank's asset portfolio as an effective source of liquidity. Colindodds (1982) delineates
three criteria for assets to ensure swift convertibility with minimal loss. On the other
hand, the Liability Management Theory focuses on activities related to obtaining funds
 17

from depositors and other creditors, as well as determining the appropriate mix of funds
for a specific bank (Ibe, 2013).

While scholars have offered critical evaluations of liquidity management theories, there
is a general consensus that during periods of financial distress, banks may face
challenges in obtaining desired liquidity due to diminished market confidence and
perceived lack of creditworthiness. Nonetheless, for a healthy bank, liabilities play a
crucial role as a significant source of liquidity (Margono et al., 2020). In essence, the
Shiftable Assets Theory underscores the importance of holding easily transferable
assets, particularly marketable securities, to ensure a bank's liquidity, while the Liability
Management Theory emphasizes the effective management of liabilities as a key
strategy for maintaining sufficient liquidity (Alshatti, 2015).

Anticipated Income Theory

The Anticipated Income Theory posits that effective management of a bank's liquidity
can be achieved by strategically structuring loan commitments based on the anticipated
future income and creditworthiness of borrowers. This theory underscores the
significance of evaluating borrowers' earning potential as a means to ensure sufficient
liquidity. By aligning loan repayment schedules with borrowers' future income streams,
banks can proactively plan and manage their liquidity positions. This theory advocates
for the concept of self-liquidating commitments, where banks prioritize lending to
borrowers with income streams expected to generate adequate funds for loan
repayment. By adopting this approach, banks can mitigate liquidity risks and enhance
their capacity to fulfill obligations (Taiwo et al., 2017).

In response to the Anticipated Income Theory, many commercial banks have integrated
a ladder effect into their investment portfolios. This strategy involves diversifying loan
maturities to establish a staggered repayment schedule that aligns with borrowers'
anticipated income flows (Hsieh, 2003). Implementation of this approach enables banks
to mitigate liquidity risks and bolster their overall liquidity management capabilities. In
essence, the Anticipated Income Theory underscores the importance of assessing
borrowers' earning potential and creditworthiness in liquidity management. Through
structuring loan commitments based on future income streams, banks can fortify their
liquidity positions and minimize the likelihood of liquidity shortages. This theory has
prompted commercial banks to adopt strategies such as self-liquidating commitments
 18

and ladder effects in their loan portfolios to effectively manage liquidity (Browning &
Collado, 2001).

Empirical Review

Review of Literature Before 2000

Amjath and Begum (1990) investigated the impact of Liquidity Risk on licensed
Commercial Banks in Sri Lanka. The study utilized four key variables: Loan to deposits
Ratio, Statutory Liquid Asset Ratio, Non-Performing Loans, and Liquidity Gap as
independent variables, while Return on assets, Return on equity, and Net Interest
Margin served as dependent variables over a ten-year period from 2011 to 2020.
Pearson’s correlation analysis and multiple regression analysis were employed for data
analysis. The findings revealed a positive relationship between Loan to Deposit and
ROA. Additionally, ROE and NIM exhibited a positive relationship with SLAR and a
negative relationship with ROE and NIM. Conversely, NPL and LG showed a negative
relationship with ROA and ROE and a positive relationship with NIM. The study
contributes to understanding liquidity risk factors and their impact on bank financial
performance, emphasizing the importance of maintaining proper liquidity positions for
sustainable operations.

Audretsch and Elston (1994) investigated the relationship between liquidity constraints
and investment behavior across a sample of German firms from 1968 to 1985. The
study aimed to determine whether firm size influenced the impact of liquidity
constraints on investment behavior. Utilizing data analysis techniques over the
specified time period, the researchers found that smaller firms exhibited greater
sensitivity to liquidity constraints compared to larger enterprises. This suggests that
smaller firms may face disadvantages in accessing finance relative to their larger
counterparts. Interestingly, the study revealed that liquidity constraints in Germany
emerged primarily after the mid-1970s, indicating a shift in the financial landscape.
Prior to this period, even smaller enterprises were not significantly affected by financial
constraints, reflecting the efficacy of the German financial model. However, from the
mid-1970s onwards, evidence suggests that liquidity constraints became more
prevalent, particularly impacting smaller businesses. The findings underscore the
importance of understanding the dynamics of liquidity constraints on firm investment
 19

behavior, especially concerning the differential effects on firms of varying sizes within
the German context.

Holland et al. (1997) conducted a study aiming to investigate the impact of

globalization and information technology on the strategy and profitability of the
banking industry. Utilizing a comprehensive analysis, the researchers explored the
factors contributing to the decline in bank profitability from the 1980s to the 1990s,
attributing it to various factors such as the diminishing role of traditional banking
activities, poorly performing debts, and local economic downturns. The study argued
that traditional analyses of bank performance often lack a long-term and broad
perspective, failing to elucidate the underlying trends and processes of change within
the industry. It proposed that the overarching competitive forces of globalization,
information technology, and deregulation are destabilizing the banking sector,
prompting significant changes including the emergence of new entrants,
disintermediation, innovation, and shifts in customer behavior. Through illustrative
examples from different bank markets, the study demonstrated the need for different
approaches to compete in these evolving markets. Furthermore, the researchers outlined
potential strategies for addressing the challenges posed by the new banking landscape,
considering factors such as bank size and type. The study concluded by discussing the
long-term outlook for the banking industry in light of these transformative forces.

Review of Literature After 2000

Alshatti (2015) discovered a positive correlation between an increase in the quick ratio
and investment ratio of available funds and profitability. Conversely, a negative
correlation was observed between the capital ratio and liquid assets ratio and the
profitability of Jordanian commercial banks. The researcher recommended optimizing
the use of available liquidity across diverse investment areas to enhance banks'
profitability. Moreover, a comprehensive framework for liquidity management was
suggested to ensure adequate liquidity for efficient operations, along with a
recommendation for an analytical study on liquidity evolution rates and achieving a
balance between fund sources and uses.

Sheikhdon and Kavale (2016) found a positive impact of each liquidity management
driver on the financial performance of commercial banks in Mogadishu. They
concluded that liquidity management drivers significantly influenced the financial
 20

performance of commercial banks in Mogadishu, emphasizing the importance of

careful analysis and selection of suitable drivers by managers to achieve optimal
performance.

Bagh et al. (2017) revealed that ADR, CDR, and DAR positively and significantly
impacted ROA, while they had a negative and significant impact on ROE. Additionally,
CR, ADR, CDR, and DAR had a positive and significant impact on ROE. The study
recommended the implementation of well-established liquidity management
procedures tailored for financial institutions in all financial markets, emphasizing
effective execution by management as a top priority.

Sathyamoorthi et al. (2020) conducted a study where the results indicated statistically
significant positive relationships between the Loans to total assets ratio and Liquid
assets to total assets ratio with both Return on Assets and Return on Equity. Conversely,
Loans to deposits ratio and Liquid assets to deposits ratio demonstrated statistically
significant negative relationships with Return on Assets and Return on Equity. The
Cash and cash equivalents to total assets ratio exhibited a statistically insignificant
positive relationship, while the Cash to deposits ratio showed a statistically insignificant
negative relationship with both Return on Assets and Return on Equity. The study's
findings suggested that commercial banks should optimize liquidity variables to
enhance their performance.

Alim et al. (2021) emphasized the crucial role of the banking sector in Pakistan's
financial market and its implications for the country's overall economy. Their study
found a positive impact of increased liquidity levels on the performance of commercial
banks in Pakistan, aligning with previous research and existing literature. They
underscored the central bank's role in requiring banks to maintain an optimal liquidity
position to maximize benefits and enhance returns, contributing to financial stability
and economic growth in Pakistan.

Safi et al. (2021) reported significant positive associations between the use of prudential
loan management strategies at the Bank of Kigali and its financial performance. Their
analysis revealed a positive and significant relationship between liquidity management
requirements and the financial performance of the Bank of Kigali. They concluded that
loan management strategies had a noteworthy impact on financial performance,
 21

highlighting the importance of research skills honed through the completion of the
study for future endeavors in the field.

Ajao and Iyekekpolor (2022) conducted an empirical analysis, revealing that the most
effective liquidity management strategy for enhancing the performance of Deposit
Money Banks (DMBs) in West African countries was the reduction of the cash to
deposit ratio. Additionally, they found that loans and advances to total assets
significantly impacted the financial performance of DMBs in the sampled countries.
While the ratio of loans and advances to total assets was associated with return on
equity, the ratio of loans and advances to deposits did not demonstrate a significant
effect on financial performance. The study emphasized the importance for banks in the
specified countries to monitor their deposit mobilization capacity, as it had significant
implications for liquidity management strategies.

Zaharum et al. (2022) observed a positive relationship between the current ratio (CR)
and return on assets (ROA), indicating that higher CRs corresponded with increased
ROA. Conversely, they noted a negative correlation between non-performing loans
(NPL) and ROA, suggesting that elevated NPL levels were associated with reduced
ROA. Consequently, the study recommended that banks strike a balance in maintaining
liquidity levels to meet defined liabilities while avoiding excessive liquidity that could
potentially hinder profitability.

Abuga et al. (2023) concluded that Net Stable Funding and Liquidity Coverage had a
significant positive impact on the financial performance of commercial banks in Kenya.
Conversely, Provisioning for Non-Performing Loans, Liquidity Gap, and Provisioning
for Nonperforming Loans exhibited a noteworthy negative effect on bank performance.
Their study also highlighted the moderating role of bank competition in the relationship
between liquidity capacity and bank performance.

Joseph and Adelegan (2023) study revealed non-significant relationships between

various liquidity indicators and bank profitability metrics in Nigeria. Despite this, they
recommended enhanced regulatory oversight by the Central Bank of Nigeria (CBN)
and proposed measures such as the establishment of a financial court to prosecute loan
defaulters. Moreover, they emphasized the importance of ongoing training and
professional development for bank staff and suggested enforcing limits on the career
progression of staff lacking requisite qualifications.
 22

Rehman and Jannat (2023) assessed the impact of liquidity indicators on the
profitability of private commercial banks in Afghanistan. While the networking capital
ratio exhibited an insignificant effect on ROA, the current ratio significantly and
positively influenced ROA. Their findings underscored the significant influence of
liquidity on bank profitability, advocating for prudent operational risk management,
portfolio diversification, and reduced leverage levels. Additionally, they urged
regulatory authorities to expand regulatory frameworks to guide and support banks
effectively.

Erfani and Heydari (2023) posited the banking sector's pivotal role in channeling
liquidity towards productive sectors, thus fostering economic prosperity. They
underscored liquidity management as a critical factor influencing bank profitability,
necessitating effective management to fulfill obligations and capitalize on investment
opportunities. Their research introduced a composite index representing bank liquidity
management, with results indicating a significantly positive effect of liquidity
management on bank profitability, particularly pronounced in private and semi-state
banks compared to state-owned banks.

Khadijat (2024) illustrated that relationship between liquidity, loan-to-deposit ratio,

interest rates, and financial development in Nigeria. The study reveals that while the
liquidity ratio of commercial banks has a positive impact on financial development, this
effect is deemed insignificant at a 5 percent significance level. Conversely, the loan-to-
deposit ratio demonstrates a significant and positive influence on financial
development, suggesting that the allocation of loans relative to deposits plays a crucial
role in driving financial growth. However, the study also highlights a concerning trend,
indicating that interest rates in Nigeria have a negative and significant impact on
financial development, emphasizing the need for a cautious approach to monetary
policy. In light of these findings, this paper underscores the importance of robust credit
risk management policies for banks to evaluate borrower creditworthiness effectively
and mitigate risks associated with loan defaults. Moreover, ensuring adequate liquidity
to meet the demands of depositors and borrowers emerges as a crucial strategy to
maintain confidence in the banking system's ability to fulfill its obligations, thereby
promoting overall financial stability and development in Nigeria.

Tasie et al. (2024) unveiled the pressing issue of liquidity management within the
Nigerian banking industry. The research findings highlighted liquidity management as
 23

a critical challenge, emphasizing the vital role it plays in sustaining the economy. The
researchers underscored the necessity for banks to employ competent and qualified
personnel to make informed decisions regarding optimal liquidity levels while still
maximizing profitability. They emphasized that every firm, regardless of its nature or
scale of operations, requires a certain level of liquidity to function effectively.
Liquidity, akin to the lifeblood of an economy, was depicted as essential for achieving
optimal economic and business objectives. This study also emphasized that effective
liquidity management is pivotal for a bank's survival and attractiveness to investors.
They metaphorically likened liquidity to the bloodstream in animals, highlighting how
efficient liquidity flow keeps banks operational, much like efficient blood circulation
sustains life. Overall, their study underscored the critical importance of efficient
liquidity management in ensuring the continued viability and success of banks within
the Nigerian financial landscape.

Review of Nepalese Studies

Mishra and Pradhan (2019) revealed a significant negative relationship between Cash-
Deposit Ratio (CDR) and Investment-Deposit Ratio (IDR) with Return on Assets
(ROA). However, in the case of Return on Equity (ROE), the study did not identify a
significant relationship between banks' profitability and liquidity, considering all
variables for the selected private sector banks in India. Consequently, the study
suggested that commercial banks have the potential to enhance their profitability
without compromising their liquidity and vice versa.

Pradhan and Gautam (2019) found a positive relationship between the capital ratio and
return on assets, suggesting that higher capital ratios were associated with increased
returns on assets. Furthermore, positive correlations were identified between the
investment ratio and current assets ratio with both return on assets and return on equity,
indicating that higher ratios of these variables led to enhanced profitability. However,
the study observed a negative relationship between the liquid asset ratio and return on
assets and return on equity, suggesting that higher liquid asset ratios were associated
with decreased returns. The regression analysis also revealed positive beta coefficients
for the current assets ratio and liquid asset ratio concerning return on equity, while
negative beta coefficients were found for the quick ratio in relation to return on assets.
 24

Mishra and Swain (2020) found that liquidity management determinants significantly
influenced the profitability of the sampled banks. Their study recommended that banks
maintain a minimum balance of liquid assets to enhance profitability and preserve
public confidence. Shrestha (2018) discovered that liquidity did not have a significant
impact on the profitability of Nepalese commercial banks.

Shrestha and Chaurasiya (2023) unveiled insights indicating that 61.5% of the variation
in Return on Assets (ROA), the dependent variable, was elucidated by the independent
variables, while the remaining 38.5% was attributed to unaccounted external factors.
Their study showcased a robust positive correlation between the dependent variable and
the set of independent variables. Notably, they highlighted the significant impact of
Total Loans to Total Assets Ratio (TLTAR) on ROA, while other variables such as
Credit Deposit Ratio (CDR), Capital Adequacy Ratio (CAR), Cash Reserve Ratio
(CRR), and Total Deposits to Total Assets Ratio (TDTAR) demonstrated an
insignificant influence on ROA for Commercial Bank in Nepal.

Research Gap

The research landscape outlined in the provided studies, spanning various geographical
locations and years, includes contributions from Khadijat (2024); Tasie et al. (2024);
Shrestha and Chaurasiya (2023); Erfani and Heydari (2023); Rehman and Jannat
(2023); Joseph and Adelegan (2023); Abuga et al. (2023); Zaharum et al. (2022); Ajao
and Iyekekpolor (2022); Safi et al. (2021); Alim et al. (2021); Sathyamoorthi et al.
(2020); Mishra and Pradhan (2019); Pradhan and Gautam (2019); Mishra and Swain
(2020); Shrestha (2018); Bagh et al. (2017); Sheikhdon and Kavale (2016); and Alshatti
(2015). These studies collectively illuminate various aspects of liquidity management
and its implications for bank profitability across different regions and time periods.

Firstly, in terms of context gap, the examination of liquidity and profitability dynamics
within Nepalese Commercial Bank is notably absent in prior research. While studies
have explored similar themes in various global contexts such as Nigeria, Kenya, and
Jordan, the unique characteristics and challenges of Nepal's banking sector warrant
focused investigation, making this study's contribution particularly novel and relevant.

Secondly, considering the time gap, the utilization of the latest available data spanning
from FY 2013/14 to 2022/23 sets this study apart from previous research efforts. This
temporal coverage ensures that the analysis captures recent developments and trends in
 25

the Nepalese banking industry, providing timely insights into the dynamics of liquidity
and profitability within this specific context.

Thirdly, regarding variable gap, while prior studies have examined liquidity and its
impact on profitability, not all have utilized the same set of liquidity metrics and
profitability measures. By incorporating a comprehensive range of liquidity indicators
such as Loan & Advance to Deposit Ratio (LDR), Cash Reserve Ratio (CRR), and
Current Ratio (CUR), among others, this study offers a nuanced understanding of the
relationship between liquidity management practices and financial performance in
Nepalese Commercial Bank.

Moreover, the methodology gap is addressed through the adoption of both descriptive
statistics and a causal comparative research design. This dual approach enables the
study to not only provide a detailed overview of liquidity and profitability trends but
also to establish causal relationships between liquidity metrics and profitability
measures, thus enhancing the robustness and depth of the analysis.

Lastly, the effort made by this study to bridge these identified research gaps signifies a
significant contribution to the literature on banking and finance, particularly within the
context of emerging markets like Nepal. By shedding light on the intricate interplay
between liquidity management and financial performance in Nepalese Commercial
Bank, this research aims to inform policymakers, banking practitioners, and academics
alike, thereby advancing both theoretical understanding and practical decision-making
in the field.
 Chapter III
Research Methodology

The research methodology is a thorough and structured process designed to gather and
assess data systematically in order to meet its objectives. It covers multiple facets
including research design, target population, sampling, data origins, collection
methods, tools, processing, and analysis techniques. At its core, the study aims to
investigate how liquidity affects the profitability of Commercial Bank in Nepal. This
involves identifying key variables and developing models to aid in the examination of
these relationships.

Research Design

The research design refers to the overall strategy or plan that outlines how the research
study will be conducted, including the methods and procedures to be used for data
collection, analysis, and interpretation. It serves as a blueprint for the entire research
process, guiding researchers in achieving their objectives effectively and efficiently
(Marczyk et al., 2010).

In this study, a combination of descriptive statistics and causal-comparative research

design has been employed to analyze the impact of liquidity on the profitability of
Commercial Bank in Nepal. The descriptive statistics aspect involves summarizing and
presenting the characteristics of the data collected, providing insights into the key
variables such as liquidity ratios and profitability measures. This allows for a
comprehensive understanding of the current state of liquidity and profitability in the
context of Commercial Bank in Nepal. On the other hand, the causal-comparative
research design enables the examination of causal relationships between liquidity and
profitability variables. By comparing different groups or conditions, this design allows
researchers to identify potential causal factors influencing profitability outcomes.
Overall, the combination of these research approaches provides a robust framework for
investigating the intricate relationship between liquidity and profitability in the specific
context of Commercial Bank in Nepal.

Population and Sample, and Sampling Design

In this study, the total population comprises all commercial banks operating in Nepal,
amounting to 20 commercial banks. From this population, a sample comprising two
 27

premier Commercial Bank has been meticulously chosen: Everest Bank Ltd. (EBL) and
Himalayan Bank Ltd. (HBL). The selection process adhered to the principles of the
simple random sampling method, ensuring that each bank within the population had an
equal probability of being included in the sample. This rigorous approach enhances the
representativeness and reliability of the selected banks. By focusing on these
distinguished Commercial Bank, the study endeavors to provide a thorough
examination of the relationship between liquidity and profitability within this specific
segment of the Nepalese banking sector.

Nature and Sources of Data and the Instrument of Data Collection

This study has adopted a quantitative research approach, utilizing secondary data
obtained from the published annual reports of sampled Commercial Bank in Nepal. The
data covers the fiscal years from 2013/14 to 2022/23, providing a comprehensive
dataset for analysis. Annual reports have been the primary source of financial
information, offering detailed insights into a bank's liquidity and profitability over time.
By collecting data from these reports, the study has ensured consistency and reliability
in the information gathered. This approach has allowed for a thorough examination of
the relationship between liquidity and profitability in Commercial Bank, facilitating
rigorous statistical analysis and robust conclusions. Moreover, the use of secondary
data has minimized potential biases associated with primary data collection and
enhanced the generalizability of the study's findings to the broader population of
Commercial Bank in Nepal.

Method of Analysis

Following data collection, this study meticulously analyzed the gathered data utilizing
Microsoft Excel to prepare it for thorough examination. Subsequently, both Microsoft
Excel and SPSS were employed in the analysis phase. The methodology encompassed
the utilization of financial tools and statistical tools. Financial tools included ratio
analysis of independent variables related to liquidity, such as Loan & Advance to
Deposit Ratio (LDR), Cash Reserve Ratio (CRR), NRB Balance to Total Deposit Ratio
(NDR), Current Ratio (CUR), Cash in Hand to Total Deposit Ratio (CDR), and Current
Asset to Total Asset Ratio (CTR). Concurrently, dependent variables of profitability,
including Return on Asset (ROA) and Return on Equity (ROE), were scrutinized.
Following the financial analysis, the data underwent statistical analysis employing
 28

descriptive statistics, which involved calculating measures such as minimum,

maximum, mean, and standard deviation. Moreover, correlation and regression
analyses were conducted to assess the impact of liquidity on the profitability of
Nepalese Commercial Bank. Through the combined use of financial and statistical
tools, this study aimed to provide a comprehensive understanding of the relationship
between liquidity and profitability in the context of Nepalese banking sector.

Financial Tools

In this study, an array of financial tools is employed to examine the relationship

between liquidity management and profitability in the banking sector. These tools
encompass a range of financial ratios that offer insights into different aspects of a bank's
operations and financial health. Among these ratios are the Loan & Advance to Deposit
Ratio (LDR), which indicates the proportion of loans and advances granted by the bank
relative to its total deposits. The Cash Reserve Ratio (CRR) is another crucial metric,
representing the proportion of total deposits that banks are required to hold in reserve
with the central bank. Additionally, the study considers the NRB Balance to Total
Deposit Ratio (NDR), providing an indication of the bank's balance with the central
bank relative to its total deposits, thus reflecting its liquidity position. The Current Ratio
(CUR) offers insights into the bank's short-term liquidity position by comparing its
current assets to its current liabilities. Another vital metric included in the analysis is
the Cash in Hand to Total Deposit Ratio (CDR), which assesses the bank's ability to
meet immediate withdrawal demands from depositors. Furthermore, the study
incorporates the Current Asset to Total Asset Ratio (CTR), which evaluates the
proportion of current assets in relation to the bank's total assets, offering insights into
its liquidity and asset composition. Finally, the analysis assesses profitability using the
Return on Asset (ROA) and Return on Equity (ROE) ratios. ROA measures the bank's
efficiency in generating profits from its assets, while ROE evaluates its profitability in
relation to shareholders' equity. By utilizing this comprehensive set of financial ratios,
the study aims to provide a multifaceted examination of liquidity management and its
impact on profitability in the banking sector. These tools enable a thorough evaluation
of various liquidity indicators and profitability metrics, offering valuable insights for
stakeholders and policymakers in the financial industry.
 29

Loan and Advance to Deposit Ratio (LDR)

This ratio measures the proportion of a bank's total loans and advances to its total
deposits. It indicates the extent to which a bank relies on customer deposits to fund its
lending activities. A higher LDR suggests that the bank is more aggressive in lending
out its deposits, while a lower ratio indicates a more conservative lending approach.
This can be presented as:

Total Loan and Advances

Loan and Advance to Deposit Ratio (LDR) =
Total Deposit

Cash Reserve Ratio (CRR)

The Cash Reserve Ratio (CRR) is a regulatory requirement set by the central bank that
mandates commercial banks to maintain a certain percentage of their total deposits as
reserves in the form of cash or deposits with the central bank. It is one of the monetary
policy tools used by central banks to control the money supply in the economy and
influence economic activity. CRR serves multiple purposes in the banking system.
Firstly, it helps ensure the stability of the financial system by acting as a buffer against
bank runs or liquidity crises. By mandating banks to hold a portion of their deposits in
reserve, CRR ensures that banks have sufficient liquidity to meet depositor withdrawals
and other short-term obligations. This enhances depositor confidence in the banking
system and reduces the risk of bank failures. This can be presented as:

Cash and Bank Balance

Cash Reserve Ratio (CRR) =
Total Deposit

NRB Balance to Total Deposit Ratio (NDR)

This ratio represents the proportion of a bank's total deposits held as a balance at the
Nepal Rastra Bank (NRB), the central bank of Nepal. It reflects the bank's liquidity
position and its reliance on central bank reserves to meet depositor withdrawals. A
higher NDR indicates a larger portion of deposits held in reserve at the central bank.
This can be presented as:

Balance at NRB
NRB Balance to Total Deposit Ratio (NDR) =
Total Deposit
 30

Current Ratio (CUR)

The Current Ratio measures a bank's ability to meet its short-term obligations with its
short-term assets. It is calculated by dividing total current assets by total current
liabilities. A higher current ratio indicates a stronger liquidity position, as the bank has
more current assets available to cover its current liabilities. This can be presented as:

Total Current Assets

Current Ratio (CUR) =
Total Current Liabiilties

Cash in Hand to Total Deposit Ratio (CDR)

This ratio represents the proportion of a bank's total deposits held in the form of cash
on hand. It reflects the bank's liquidity position and its ability to meet depositor
withdrawals with cash reserves. A higher CDR suggests a higher level of cash reserves
relative to deposits, indicating a stronger liquidity position. This can be presented as:

Cash in Hand
Cash in Hand to Total Deposit Ratio (CDR) =
Total Deposit

Current Asset to Total Asset Ratio (CTR)

The Current Asset to Total Asset Ratio measures the proportion of a bank's total assets
that are comprised of current assets. Current assets are those that are expected to be
converted into cash within one year. A higher CTR indicates a larger proportion of
short-term, liquid assets in the bank's asset portfolio. This can be presented as:

Total Current Assets

Current Asset to Total Asset Ratio (CTR) =
Total Assets

Return on Assets (ROA)

Return on Assets is a financial metric that measures a bank's profitability relative to its
total assets. It indicates how efficiently a bank is generating profits from its asset base.
A higher ROA suggests that the bank is generating more profit per unit of assets, while
a lower ratio may indicate inefficiencies in asset utilization. This can be presented as:

Net profit/loss
Return on Assets(ROA) =
Total Assets

Return on Equity (ROE)

Return on Equity is a measure of a bank's profitability relative to its shareholders'

equity. It indicates how effectively the bank is generating profits from the equity
 31

invested by shareholders. A higher ROE suggests that the bank is generating higher
returns for its shareholders, while a lower ratio may indicate lower profitability relative
to shareholder equity. This can be presented as:

Net profit/loss
Return on Equity(ROE) =
Total Shareholder ′ s Equity

Statistical Tools

The application of statistical methodologies holds significant importance in research

endeavors, providing researchers with the means to analyze data effectively. These
tools serve as vital instruments in extracting meaningful insights and drawing
dependable conclusions from gathered data sets. Within the context of this study, a
range of statistical techniques including mean calculation, standard deviation
computation, coefficient of variation assessment, correlation analysis, and regression
analysis have been employed to thoroughly scrutinize the dataset. Through the
utilization of these statistical methods, a comprehensive exploration of the data is
undertaken, facilitating a deeper comprehension of inherent relationships and patterns.
By leveraging these analytical tools, the study aims to extract valuable insights and
offer well-grounded interpretations, thereby making a substantial contribution to the
existing knowledge base within the field.

Mean

The mean serves as a frequently utilized metric for central tendency, offering insight
into the average value within a dataset. Computation of the mean involves summing up
all values present in the dataset and subsequently dividing this sum by the total count
of values. This calculation yields a singular value that encapsulates the dataset,
providing a representation of its typical value. The mean finds extensive application
across diverse domains to characterize the average or typical value of a sample or
population. It stands as a foundational component in data analysis and inferential
statistics, facilitating a deeper understanding of datasets and informing analytical
interpretations.

∑ 𝑓𝑥
Mean (X̅ ) =
N

Where,

X = Value of observation of each independent or dependent variable

 32

N = Number of observations

Standard Deviation (S.D.)

The standard deviation is a statistical metric used to measure the extent of variability
or dispersion within a dataset. It offers valuable information regarding the deviation of
individual data points from the mean, thereby revealing the distribution of the data. A
lower standard deviation implies that data points are closely grouped around the mean,
indicating minimal variability. Conversely, a higher standard deviation signifies that
data points are more widely spread from the mean, indicating greater variability within
the dataset.

̅) 2
∑(𝑋 − X
Standard Deviation(σ) = √
N

Where,

X = Value of observation of dependent or independent variable

X̅ = Mean value of observation of each dependent or independent variable

N= Number of observations

Correlation Analysis

Correlation analysis is a statistical method used to assess the relationship between two
variables. The correlation coefficient, often denoted as "r," is a numerical measure that
indicates both the strength and direction of this relationship. It ranges from -1 to 1,
where a positive value (0 < r < 1) signifies a direct relationship: as one variable
increases, the other tends to increase as well. Conversely, a negative value (-1 < r < 0)
indicates an inverse relationship: as one variable increases, the other tends to decrease.
The correlation coefficient between two variables is also calculated by using the
following formula:

𝑛 ∑ 𝑥𝑦 − ∑ 𝑥 ∑ 𝑦
Correlation Coefficient(r) =
√𝑛 ∑ 𝑥 2 − (∑ 𝑥)2 √𝑛 ∑ 𝑦 2 − (∑ 𝑦)2

Where,

n = Number of observations

x = Value of independent variable

 33

y= Value of dependent variable

Regression Analysis

Regression analysis is a statistical technique employed to explore the association

between a dependent variable and one or more independent variables. It aids in
comprehending how alterations in the independent variables correspond to changes in
the dependent variable. By estimating the strength and direction of this association,
regression models enable researchers to predict outcomes and draw inferences
regarding the influence of independent variables on the dependent variable. In the
context of this study, regression analysis has been utilized to examine the effect of
liquidity on the profitability of Nepalese joint venture banks. Following has been the
two-regression model used in this study

Regression Model I

YROA = α + β1 LDR + β2 CRR + β3 NDR + β4 CUR +β5 CDR + β6 CTR E ………… Eq (1)

Regression Model II

YROE = α + β1 LDR + β2 CRR + β3 NDR + β4 CUR +β5 CDR + β6 CTR E ………… Eq (1)

Where,

ROA = Return on Assets

ROE = Return on Equity

LDR = Loan & Advance to Deposit Ratio

CRR = Cash Reserve Ratio

NDR = NRB Balance to Total Deposit Ratio

CUR = Current Ratio

CDR = Cash in Hand to Total Deposit Ratio

CTR = Current Asset to total Asset Ratio

α = Intercept Term

E = Error

β1, β2 , β3 , β4 , β5 , β6 = Beta Coefficients

 34

Research Framework and Definition of Variables

Research Framework

The research framework adopted from Shrestha and Jha (2020), focuses on examining
the Impact of Liquidity on Profitability in Foreign Commercial Bank in Nepal, with
specific reference to EBL and HBL, The independent variables under consideration
include Loan & Advance to Deposit Ratio (LDR), Cash Reserve Ratio (CRR), NRB
Balance to Total Deposit Ratio (NDR), Current Ratio (CUR), Cash in Hand to Total
Deposit Ratio (CDR), and Current Asset to Total Asset Ratio (CTR). These variables
are assessed alongside the dependent variables of Profitability, measured by Return on
Asset (ROA) and Return on Equity (ROE).

Independent Variables Dependent Variables

Liquidity Profitability

Loan & Advance to Deposit Ratio (LDR)

Cash Reserve Ratio (CRR)

Return on Asset (ROA)
NRB Balance to Total Deposit Ratio (NDR)
Return on Equity (ROE)
Current Ratio (CUR)

Cash in Hand to Total Deposit Ratio (CDR)

Current Asset to Total Asset Ratio (CTR)

Source: Shrestha and Jha (2020)

Figure 1. Research Framework of this study

 35

Operational Definition of Variables

The variables used for this study is defined as follows.

Independent Variables

Loan & Advance to Deposit Ratio (LDR)

Loan & Advance to Deposit Ratio (LDR) is a financial metric used to assess a bank's
lending activities relative to its deposit base. It is calculated by dividing the total loans
and advances by the total deposits held by the bank. A higher LDR indicates that a
larger portion of the bank's deposits is being used for lending activities, potentially
increasing the bank's profitability through interest income on loans (Saleh & Winarso,
2021).

Cash Reserve Ratio (CRR)

Cash Reserve Ratio (CRR) is a regulatory requirement that determines the proportion
of a bank's total deposits that it must hold in cash reserves. It is expressed as a
percentage and is set by the central bank. The CRR aims to ensure the stability of the
financial system by controlling the amount of money banks can lend out and promoting
liquidity in the banking sector (Galbraith & Guthrie, 1970).

NRB Balance to Total Deposit Ratio (NDR)

NRB Balance to Total Deposit Ratio (NDR) represents the ratio of a bank's balance at
the central bank to its total deposits. It indicates the proportion of a bank's deposits that
it holds as reserves with the central bank. A higher NDR suggests that a larger portion
of the bank's deposits is kept in reserve, which may affect its liquidity position and
ability to lend (Shrestha & Jha, 2020).

Current Ratio (CUR)

Current Ratio (CUR) is a financial metric used to assess a bank's short-term liquidity
position and ability to meet its short-term obligations. It is calculated by dividing the
total current assets by the total current liabilities. A higher current ratio indicates that
the bank has more current assets available to cover its current liabilities, suggesting a
stronger liquidity position (Husna & Satria, 2019).
 36

Cash in Hand to Total Deposit Ratio (CDR)

Cash in Hand to Total Deposit Ratio (CDR) represents the ratio of a bank's cash
holdings to its total deposits. It reflects the bank's liquidity position and ability to meet
withdrawal demands from depositors. A higher CDR indicates that a larger portion of
the bank's deposits is held in cash, potentially reducing its ability to earn returns through
lending activities (Goel & Kumar, 2016).

Current Asset to Total Asset Ratio (CTR)

Current Asset to Total Asset Ratio (CTR) measures the proportion of a bank's total
assets that are classified as current assets. It is calculated by dividing the total current
assets by the total assets. A higher CTR indicates that a larger portion of the bank's
assets is composed of current assets, such as cash, receivables, and inventory, which
are expected to be converted into cash within a year. This ratio provides insights into
the bank's liquidity and short-term financial health (Shrestha & Jha, 2020).

Dependent Variables

Return on Assets (ROA)

Return on assets (ROA) is a fundamental metric that assesses a company's efficiency

in generating profits relative to its total assets. Calculated by dividing net income by
average total assets, ROA indicates how effectively a company utilizes its assets to
generate earnings. A higher ROA signifies efficient asset utilization, reflecting strong
management practices, effective operational strategies, and sound financial health.
Analyzing ROA over time or against industry benchmarks provides insights into a
company's performance and competitiveness, with a consistently high ROA suggesting
sustainable profitability and efficient asset management. Conversely, a declining or
below-average ROA may indicate operational inefficiencies or challenges. Overall,
ROA serves as a crucial indicator for investors, analysts, and stakeholders, offering
valuable insights into a company's financial performance and management
effectiveness (Nenobais et al., 2022).

Return on Equity (ROE)

Return on equity (ROE) stands as a pivotal measure of profitability, spotlighting a

company's prowess in delivering returns to its shareholders. It's computed by dividing
net income by average shareholders' equity, thereby illuminating how efficiently a
 37

company utilizes its equity capital to generate earnings. A higher ROE signals effective
management practices and underscores the company's ability to yield robust returns on
investments made by its shareholders. This metric serves as a crucial gauge for
investors, offering insights into the company's capacity to deliver value and generate
profits relative to the equity invested. Analyzing ROE over time or in comparison with
industry benchmarks unveils trends in financial performance and management
effectiveness, guiding stakeholders in assessing the company's growth potential and
overall financial health (Rahman et al., 2019).
 Chapter IV
Results and Discussion

This section offers a thorough overview of the study's outcomes by presenting the
findings derived from descriptive statistics, correlation analyses, and regression
analyses. These results provide significant insights into the variables under scrutiny.
Furthermore, the discussion entails a comparative analysis with pertinent findings from
previous research studies, aiming to identify both connections and discrepancies to
enhance the comprehension of the current study's results. By amalgamating results and
discussions, a comprehensive interpretation of the empirical findings is achieved,
thereby fostering a deeper understanding of the relationships and patterns revealed
through the research analyses.

Results

This segment meticulously showcases the study's outcomes through structured tables,
thereby enhancing the lucidity and accessibility of the findings. Each table is
meticulously explained, offering a nuanced interpretation of the numerical data. This
detailed presentation enables readers to discern the significant trends, correlations, and
statistical significance of the variables investigated in the study. By combining tabular
representations with descriptive elucidations, a comprehensive and transparent
portrayal of the research results is achieved, facilitating a thorough understanding of
the study's outcomes.

Descriptive Statistics

In this section, descriptive statistics have been employed to assess the liquidity and
profitability status of Nepalese Commercial Bank, specifically focusing on Everest
Bank (EBL) and Himalayan Bank Ltd. (HBL). The analysis includes measures such as
the mean, standard deviation, minimum, and maximum values of various financial
ratios, namely Loan & Advance to Deposit Ratio (LDR), Cash Reserve Ratio (CRR),
NRB Balance to Total Deposit Ratio (NDR), Current Ratio (CUR), Cash in Hand to
Total Deposit Ratio (CDR), Current Asset to Total Asset Ratio (CTR), Return on Assets
(ROA), and Return on Equity (ROE).
 39

Table 1
Summary of Data

Bank FY LDR CRR NDR CUR CDR CTR ROA ROE

2013/14 0.780 16.910 0.152 1.042 30.296 0.955 0.023 0.284
2014/15 0.666 24.270 0.206 1.038 40.227 0.955 0.019 0.228
2015/16 0.725 16.610 0.142 1.048 37.271 0.959 0.016 0.203
2016/17 0.813 16.520 0.153 1.065 31.068 0.950 0.017 0.174
2017/18 0.815 17.750 0.164 1.217 11.476 0.979 0.020 0.160
EBL
2018/19 0.864 18.560 0.180 1.254 16.699 0.979 0.019 0.173
2019/20 0.829 14.430 0.139 1.248 13.845 0.976 0.014 0.135
2020/21 0.844 18.150 0.180 1.268 17.485 0.977 0.009 0.086
2021/22 0.842 6.500 0.064 1.226 12.317 0.974 0.011 0.109
2022/23 0.801 7.110 0.070 1.232 12.955 0.028 0.014 0.099
2013/14 0.701 37.520 0.058 1.068 58.136 0.963 0.013 0.169
2014/15 0.727 30.320 0.080 1.064 54.503 0.967 0.013 0.171
2015/16 0.776 28.740 0.065 1.078 58.288 0.965 0.019 0.245
2016/17 0.822 26.640 0.066 1.088 59.603 0.963 0.020 0.216
2017/18 0.864 23.050 0.052 1.130 21.037 0.968 0.017 0.142
HBL
2018/19 0.862 26.250 0.043 1.134 24.276 0.968 0.022 0.183
2019/20 0.809 31.390 0.094 1.144 18.235 0.969 0.018 0.154
2020/21 0.884 26.510 0.050 1.134 16.764 0.968 0.017 0.149
2021/22 0.904 23.480 0.042 1.120 15.054 0.965 0.011 0.108
2022/23 0.819 27.380 0.073 1.136 15.144 0.960 0.005 0.047
Source: Appendix I & II

The table 1 provides a summary of key financial metrics for Everest Bank Ltd. (EBL)
and Himalayan Bank Ltd. (HBL) over ten fiscal years from 2013/14 to 2022/23. For
EBL, the Loan & Advance to Deposit Ratio (LDR) ranged from 0.780 to 0.801,
indicating the proportion of total deposits utilized for loans and advances. The Cash
Reserve Ratio (CRR) fluctuated between 14.430% and 24.270%, representing the
percentage of deposits held as cash reserves. The NRB Balance to Total Deposit Ratio
(NDR) ranged from 0.139 to 0.206, showing the reliance on balances held with the
Nepal Rastra Bank. The Current Ratio (CUR) varied between 1.042 and 1.268,
indicating the ability to meet short-term liabilities. The Cash in Hand to Total Deposit
Ratio (CDR) ranged from 11.476% to 40.227%, reflecting differences in liquidity
management strategies. The Current Asset to Total Asset Ratio (CTR) ranged from
0.028 to 0.979, indicating the composition of current assets relative to total assets.
Return on Assets (ROA) varied between 0.005 and 0.023, while Return on Equity
(ROE) ranged from 0.047 to 0.284.
 40

For HBL, the LDR fluctuated between 0.701 and 0.904, reflecting a similar trend of
utilizing a significant portion of total deposits for loans and advances. The CRR ranged
from 0.042 to 0.094, with HBL maintaining higher cash reserves relative to total
deposits compared to EBL. The NDR ranged from 0.052 to 0.094, indicating
differences in reliance on balances held with the Nepal Rastra Bank compared to EBL.
The CUR varied between 1.064 and 1.136, showing sufficient current assets to meet
short-term liabilities. The CDR ranged from 15.054% to 59.603%, implying different
liquidity management strategies compared to EBL. The CTR ranged from 0.963 to
0.969, indicating differences in the composition of current assets relative to total assets
compared to EBL. ROA ranged from 0.005 to 0.022, while ROE ranged from 0.108 to
0.245.

Table 2
Summary of Descriptive Statistics

Bank LDR CRR NDR CUR CDR CTR ROA ROE

Minimum 0.666 6.500 0.064 1.038 11.476 0.028 0.009 0.086
Maximum 0.864 24.270 0.206 1.268 40.227 0.979 0.023 0.284
EBL Mean 0.798 15.681 0.145 1.164 22.364 0.873 0.016 0.165
Std.
0.061 5.321 0.046 0.101 11.138 0.297 0.004 0.062
Deviation
Minimum 0.701 23.050 0.042 1.064 15.054 0.960 0.005 0.047
Maximum 0.904 37.520 0.094 1.144 59.603 0.969 0.022 0.245
HBL Mean 0.817 28.128 0.062 1.109 34.104 0.966 0.016 0.158
Std.
0.066 4.221 0.017 0.031 20.470 0.003 0.005 0.055
Deviation
Source: Appendix I, II

The Loan & Advance to Deposit Ratio (LDR) measures the proportion of loans and
advances to total deposits held by a bank. For Everest Bank Ltd. (EBL), the LDR ranges
from 0.666 to 0.864 over the period from FY 2013/14 to 2022/23. The mean LDR for
EBL is 0.798, indicating that, on average, EBL maintains loans and advances equivalent
to approximately 79.8% of its total deposits during this period. The standard deviation
of 0.061 suggests relatively low variability around the mean LDR. The Loan &
Advance to Deposit Ratio (LDR) for Himalayan Bank Ltd. (HBL) ranges from 0.701
to 0.904 over the period from FY 2013/14 to 2022/23. The mean LDR for HBL is 0.817,
indicating that, on average, HBL maintains loans and advances equivalent to
 41

approximately 81.7% of its total deposits during this period. The standard deviation of
0.066 suggests relatively low variability around the mean LDR.

The Cash Reserve Ratio (CRR) represents the proportion of a bank's total deposits that
must be held in reserve as cash. For EBL, the CRR ranges from 6.500% to 24.270%
during the specified period. The mean CRR for EBL is 15.681%, indicating that, on
average, EBL maintains cash reserves equivalent to approximately 15.681% of its total
deposits. The standard deviation of 5.321 suggests significant variability in CRR values
over the years The Cash Reserve Ratio (CRR) for HBL ranges from 23.050% to
37.520% during the specified period. The mean CRR for HBL is 28.128%, indicating
that, on average, HBL maintains cash reserves equivalent to approximately 28.128% of
its total deposits. The standard deviation of 4.221 suggests some variability in CRR
values over the years.

The NRB Balance to Total Deposit Ratio (NDR) measures the proportion of balances
held with the Nepal Rastra Bank (NRB) to total deposits. For EBL, the NDR ranges
from 0.064 to 0.206, with a mean of 0.145. This indicates that, on average, EBL holds
balances with the NRB equivalent to approximately 14.5% of its total deposits. The
standard deviation of 0.046 suggests moderate variability in NDR values The NRB
Balance to Total Deposit Ratio (NDR) for HBL ranges from 0.042 to 0.094, with a
mean of 0.062. This indicates that, on average, HBL holds balances with the NRB
equivalent to approximately 6.2% of its total deposits. The standard deviation of 0.017
suggests relatively low variability in NDR values.

The Current Ratio (CUR) assesses a bank's ability to meet its short-term obligations
with its current assets. For EBL, the CUR ranges from 1.038 to 1.268, with a mean of
1.164. This implies that, on average, EBL possesses current assets equivalent to
approximately 116.4% of its current liabilities. The standard deviation of 0.101
suggests some variability in CUR values over time. The Current Ratio (CUR) for HBL
ranges from 1.064 to 1.144, with a mean of 1.109. This implies that, on average, HBL
possesses current assets equivalent to approximately 110.9% of its current liabilities.
The standard deviation of 0.031 suggests minimal variability in CUR values over time.

The Cash in Hand to Total Deposit Ratio (CDR) indicates the proportion of cash in
hand to total deposits held by a bank. For EBL, the CDR ranges from 11.476% to
40.227%, with a mean of 22.364%. This suggests that, on average, EBL maintains cash
 42

in hand equivalent to approximately 22.364% of its total deposits. The standard

deviation of 11.138% indicates considerable variability in CDR values. The Cash in
Hand to Total Deposit Ratio (CDR) for HBL ranges from 15.054% to 59.603%, with a
mean of 34.104%. This suggests that, on average, HBL maintains cash in hand
equivalent to approximately 34.104% of its total deposits. The standard deviation of
20.470% indicates significant variability in CDR values.

The Current Asset to Total Asset Ratio (CTR) measures the proportion of current assets
to total assets. For EBL, the CTR ranges from 0.028 to 0.979, with a mean of 0.873.
This indicates that, on average, EBL holds current assets equivalent to approximately
87.3% of its total assets. The standard deviation of 0.297 suggests significant variability
in CTR values over the period. The Current Asset to Total Asset Ratio (CTR) for HBL
ranges from 0.960 to 0.969, with a mean of 0.966. This indicates that, on average, HBL
holds current assets equivalent to approximately 96.6% of its total assets. The standard
deviation of 0.003 suggests minimal variability in CTR values over the period.

Return on Assets (ROA) measures the profitability of the bank relative to its total assets.
For EBL, the ROA ranges from 0.009 to 0.023, with a mean of 0.016 and a standard
deviation of 0.004. This indicates that, on average, EBL generates a return of 1.6% on
its total assets. The Return on Asset (ROA) for HBL ranges from 0.005 to 0.022, with
a mean of 0.016. This suggests that, on average, HBL generates a return of
approximately 1.6% on its total assets. The standard deviation of 0.005 indicates some
variability in ROA values over the period.

Return on Equity (ROE) measures the profitability of the bank relative to its
shareholders' equity. For EBL, the ROE ranges from 0.086 to 0.284, with a mean of
0.165 and a standard deviation of 0.062. This indicates that, on average, EBL generates
a return of 16.5% on its shareholders' equity. The Return on Equity (ROE) for HBL
ranges from 0.047 to 0.245, with a mean of 0.158. This implies that, on average, HBL
generates a return of approximately 15.8% on its shareholders' equity. The standard
deviation of 0.055 suggests some variability in ROE values over the period.

Correlation Analysis

In this study, the correlation analysis has been employed to examine the relationship
between liquidity and profitability, as represented by various financial ratios such as
Loan & Advance to Deposit Ratio (LDR), Cash Reserve Ratio (CRR), NRB Balance to
 43

Total Deposit Ratio (NDR), Current Ratio (CUR), Cash in Hand to Total Deposit Ratio
(CDR), and Current Asset to Total Asset Ratio (CTR), alongside the profitability
metrics Return on Asset (ROA) and Return on Equity (ROE). By conducting correlation
analysis, the study aims to uncover any patterns or trends indicating how changes in
liquidity metrics may affect the profitability of Commercial Bank in Nepal. This
analysis provides valuable insights into the interplay between liquidity management
and financial performance, thereby contributing to a deeper understanding of the factors
influencing the banking sector's profitability in the Nepalese context.

Table 3
Correlation Matrix

Variables LDR CRR NDR CUR CDR CTR ROA ROE

LDR 1
CRR -0.250 1
NDR -0.322 -0.332 1
CUR .567** -.519* 0.125 1
CDR -.645** .566** -0.116 -.711** 1
CTR 0.043 0.433 0.147 -0.256 0.192 1
ROA -0.083 0.050 0.185 -0.286 0.262 0.086 1
ROE -.456* 0.197 0.253 -.626** .619** 0.243 .831** 1
Source: Appendix III

Table 3 presents the correlation between liquidity and profitability of Commercial Bank
in Nepal from FY 2013/14 to 2022/23.

Correlation between ROA and Independent Variables

The correlation coefficient between LDR and Return on Assets (ROA) is -0.083,
indicating a negative correlation. This suggests that as the Loan & Advance to Deposit
Ratio decreases, there is a decrease in ROA. The correlation coefficient between CRR
and ROA is 0.05, indicating a positive correlation. This suggests that as the Cash
Reserve Ratio increases, there is an increase in ROA. The correlation coefficient
between NDR and ROA is 0.185, indicating a positive correlation. This suggests that
as the NRB Balance to Total Deposit Ratio increases, there is an increase in ROA. The
correlation coefficient between CUR and ROA is -0.286, indicating a negative
correlation. This suggests that as the Current Ratio decreases, there is a decrease in
ROA. The correlation coefficient between CDR and ROA is 0.262, indicating a positive
correlation. This suggests that as the Cash in Hand to Total Deposit Ratio increases,
 44

there is an increase in ROA. The correlation coefficient between CTR and ROA is
0.086, indicating a positive correlation. This suggests that as the Current Asset to Total
Asset Ratio increases, there is an increase in ROA.

Correlation between EPS and Independent Variables

The correlation coefficient between LDR and Return on Equity (ROE) is -0.456,
indicating a negative correlation. This suggests that as the Loan & Advance to Deposit
Ratio decreases, there is a decrease in ROE. The correlation coefficient between CRR
and ROE is 0.197, indicating a positive correlation. This suggests that as the Cash
Reserve Ratio increases, there is an increase in ROE. The correlation coefficient
between NDR and ROE is 0.253, indicating a positive correlation. This suggests that
as the NRB Balance to Total Deposit Ratio increases, there is an increase in ROE. The
correlation coefficient between CUR and ROE is -0.626, indicating a negative
correlation. This suggests that as the Current Ratio decreases, there is a decrease in
ROE. The correlation coefficient between CDR and ROE is 0.619, indicating a positive
correlation. This suggests that as the Cash in Hand to Total Deposit Ratio increases,
there is an increase in ROE. The correlation coefficient between CTR and ROE is 0.243,
indicating a positive correlation. This suggests that as the Current Asset to Total Asset
Ratio increases, there is an increase in ROE.

Regression Analysis

In this study, multivariate regression analysis has been employed to investigate the
impact of liquidity on profitability, considering various liquidity metrics such as Loan
& Advance to Deposit Ratio (LDR), Cash Reserve Ratio (CRR), NRB Balance to Total
Deposit Ratio (NDR), Current Ratio (CUR), Cash in Hand to Total Deposit Ratio
(CDR), and Current Asset to Total Asset Ratio (CTR), alongside the profitability
indicators Return on Asset (ROA) and Return on Equity (ROE). Through multivariate
regression analysis, the study aims to discern the extent to which changes in liquidity
variables influence the profitability of Commercial Bank in Nepal. By examining
multiple independent variables simultaneously, this analysis allows for a
comprehensive understanding of the relationship between liquidity management
practices and financial performance outcomes. The findings derived from multivariate
regression analysis contribute valuable insights into the nuanced dynamics between
 45

liquidity and profitability, providing relevant stakeholders with actionable information

to enhance decision-making processes within the banking sector.

Regression Model I

In this section, Regression Model I focused on examining the impact of liquidity

metrics on Return on Assets (ROA). Through regression analysis, the study investigates
how variations in liquidity indicators such as Loan & Advance to Deposit Ratio (LDR),
Cash Reserve Ratio (CRR), NRB Balance to Total Deposit Ratio (NDR), Current Ratio
(CUR), Cash in Hand to Total Deposit Ratio (CDR), and Current Asset to Total Asset
Ratio (CTR) relate to changes in ROA. By analyzing the regression coefficients and
associated statistical significance, this section aims to elucidate the extent to which
liquidity management practices affect the profitability of Commercial Bank in Nepal.

Table 4
Model Summary of Regression Model I

Model R R Square Adjusted R Square Std. Error of the Estimate

1 0.529 0.280 -0.052 0.005
Source: Appendix IV

Table 4 presents the Model Summary of Regression Model I, which aims to analyze
the impact of various liquidity metrics (CTR, LDR, NDR, CRR, CUR, CDR) on the
dependent variable, Return on Assets (ROA). The table provides several key statistics
to evaluate the model's performance.

The R value indicates the correlation coefficient between the observed and predicted
values of the dependent variable. In this case, it is 0.529, suggesting a moderate positive
correlation between the predictors and the ROA. The R Square value, also known as
the coefficient of determination, represents the proportion of variance in the ROA that
is predictable from the independent variables. Here, it is 0.280, indicating that
approximately 28.0% of the variance in the ROA can be explained by the independent
variables in the model. The Adjusted R Square value adjusts the R Square value for the
number of predictors in the model. In this case, it is -0.052, which is an unusual result
and may indicate issues such as multicollinearity or overfitting. The Std. Error of the
Estimate provides an estimate of the standard deviation of the residuals, which are the
differences between the observed and predicted values of the ROA. A lower value
indicates a better fit of the model to the data. Overall, this Model Summary provides
 46

insights into the explanatory power and goodness of fit of Regression Model I in
explaining the relationship between liquidity metrics and the ROA.

Table 5
ANOVA Table of Regression Model I

Model Sum of Squares df Mean Square F Sig.

Regression 0.011 6 0.002 0.844 0.005
1 Residual 0.003 13 0.002
Total 0.014 19
Source: Appendix IV

Table 5 summarizes the ANOVA results for Regression Model I, which explores the
relationship between the predictors (CTR, LDR, NDR, CRR, CUR, CDR) and the
dependent variable, Return on Assets (ROA). The table indicates that the regression
model is statistically significant (p = 0.005), suggesting a good fit for the data. With an
F-statistic of 0.844, the model effectively explains a significant portion of the variance
in ROA. The predictors collectively contribute to explaining the variance in ROA, as
evidenced by the significant regression sum of squares (0.011) compared to the residual
sum of squares (0.003). Overall, the ANOVA results support the suitability of
Regression Model I for predicting ROA based on the selected liquidity metrics.

Table 6
Beta Coefficient of Regression Model I

Unstandardized Standardized Collinearity

Coefficients Coefficients Statistics
Model t Sig.
Std.
B Beta Tolerance VIF
Error
(Constant) 0.003 0.031 0.101 0.921
LDR 0.480 0.031 0.664 1.554 0.044 0.303 3.301
CRR -0.100 0.000 -0.017 -0.049 0.001 0.441 2.269
1 NDR 0.045 0.029 0.538 1.552 0.145 0.460 2.173
CUR -0.260 0.022 -0.451 -1.223 0.024 0.407 2.460
CDR 0.129 0.000 0.485 1.179 0.259 0.327 3.054
CTR -0.590 0.007 -0.224 -0.701 0.004 0.544 1.838

Source: Appendix IV

In the Table 6 provided regression model, the unstandardized coefficient (B) for the
Loan & Advance to Deposit Ratio (LDR) is 0.48, indicating that for every one-unit
increase in LDR, the dependent variable (ROA) is expected to increase by 0.48 units.
 47

The standardized coefficient (Beta) for LDR is 0.664, suggesting a moderate positive
impact on ROA. The significance value (Sig.) for LDR is 0.044, which is below the
conventional threshold of 0.05, indicating that the relationship between LDR and ROA
is statistically significant. The Variance Inflation Factor (VIF) for LDR is 3.301, which
is below the threshold of 10, suggesting no issues of multicollinearity.

For the Cash Reserve Ratio (CRR), the unstandardized coefficient (B) is -0.1, implying
that a one-unit increase in CRR is associated with a decrease of 0.1 units in ROA. The
standardized coefficient (Beta) for CRR is -0.017, indicating a negligible impact on
ROA. The significance value (Sig.) for CRR is 0.001, indicating that the relationship
between CRR and ROA is statistically significant. The VIF for CRR is 2.269, indicating
no issues of multicollinearity.

Similarly, for the NRB Balance to Total Deposit Ratio (NDR), the unstandardized
coefficient (B) is 0.045, suggesting that a one-unit increase in NDR leads to a 0.045-
unit increase in ROA. The standardized coefficient (Beta) for NDR is 0.538, indicating
a moderate positive impact on ROA. The significance value (Sig.) for NDR is 0.145,
suggesting that the relationship between NDR and ROA is not statistically significant.
The VIF for NDR is 2.173, indicating no issues of multicollinearity.

For the Current Ratio (CUR), the unstandardized coefficient (B) is -0.26, implying that
a one-unit increase in CUR results in a decrease of 0.26 units in ROA. The standardized
coefficient (Beta) for CUR is -0.451, indicating a moderate negative impact on ROA.
The significance value (Sig.) for CUR is 0.024, indicating that the relationship between
CUR and ROA is statistically significant. The VIF for CUR is 2.46, indicating no issues
of multicollinearity.

For the Cash in Hand to Total Deposit Ratio (CDR), the unstandardized coefficient (B)
is 0.129, suggesting that a one-unit increase in CDR leads to a 0.129-unit increase in
ROA. The standardized coefficient (Beta) for CDR is 0.485, indicating a moderate
positive impact on ROA. The significance value (Sig.) for CDR is 0.259, suggesting
that the relationship between CDR and ROA is not statistically significant. The VIF for
CDR is 3.054, indicating no issues of multicollinearity.

For the Current Asset to Total Asset Ratio (CTR), the unstandardized coefficient (B) is
-0.59, indicating that a one-unit increase in CTR leads to a decrease of 0.59 units in
ROA. The standardized coefficient (Beta) for CTR is -0.224, indicating a weak negative
 48

impact on ROA. The significance value (Sig.) for CTR is 0.004, indicating that the
relationship between CTR and ROA is statistically significant. The VIF for CTR is
1.838, indicating no issues of multicollinearity.

Regression Model II

In this section, Regression Model II delves into investigating the impact of liquidity on
Return on Equity (ROE). Through regression analysis, the study explores how
variations in liquidity metrics such as Loan & Advance to Deposit Ratio (LDR), Cash
Reserve Ratio (CRR), NRB Balance to Total Deposit Ratio (NDR), Current Ratio
(CUR), Cash in Hand to Total Deposit Ratio (CDR), and Current Asset to Total Asset
Ratio (CTR) influence changes in ROE. By examining the regression coefficients and
their statistical significance, this section aims to shed light on the relationship between
liquidity management strategies and the profitability of Commercial Bank in Nepal.

Table 7
Model Summary of Regression Model II

Model R R Square Adjusted R Square Std. Error of the Estimate

2 0.797 0.635 0.466 0.042
Source: Appendix V

Table 7 presents the Model Summary of Regression Model II, focusing on the impact
of various liquidity metrics (CTR, LDR, NDR, CRR, CUR, CDR) on the dependent
variable, Return on Equity (ROE).

The R value, which measures the correlation between the observed and predicted values
of ROE, is 0.797. This indicates a strong positive correlation between the predictors
and the ROE. The R Square value, or coefficient of determination, is 0.635. This value
signifies that approximately 63.5% of the variance in ROE can be explained by the
independent variables included in the model. The Adjusted R Square value, which
adjusts the R Square value for the number of predictors in the model, is 0.466. This
suggests that the model explains 46.6% of the variance in ROE after considering the
number of predictors. The Std. Error of the Estimate provides an estimate of the
standard deviation of the residuals, or the differences between the observed and
predicted values of ROE. In this case, the value is 0.042, indicating the average
magnitude of errors in predicting ROE.
 49

Overall, the Model Summary indicates that Regression Model II has a strong
explanatory power in predicting ROE based on the selected liquidity metrics. The high
R Square value suggests that a substantial portion of the variability in ROE is accounted
for by the independent variables.

Table 8
ANOVA Table of Regression Model II

Model Sum of Squares df Mean Square F Sig.

Regression 0.039 6 0.007 3.768 0.021
2 Residual 0.023 13 0.002
Total 0.062 19
Source: Appendix V

Table 8 presents the ANOVA results for Regression Model II, examining the
relationship between the predictors (CTR, LDR, NDR, CRR, CUR, CDR) and the
dependent variable, Return on Equity (ROE). The table indicates that the regression
model is statistically significant (p = 0.021), suggesting a good fit for the data. With an
F-statistic of 3.768, the model explains a significant portion of the variance in ROE.
The regression sum of squares is 0.039, indicating that the predictors collectively
contribute to explaining the variance in ROE. Overall, the ANOVA results support the
suitability of Regression Model II for predicting ROE based on the selected liquidity
metrics.

Table 9
Beta Coefficient of Regression Model II

Unstandardized Standardized Collinearity

Coefficients Coefficients Statistics
Model t Sig.
Std.
B Beta Tolerance VIF
Error
(Constant) 0.285 0.280 1.019 0.327
LDR 0.311 0.278 0.340 1.117 0.002 0.303 3.301
CRR -0.146 0.002 -0.202 -0.800 0.033 0.441 2.269
2 NDR 0.459 0.261 0.435 1.761 0.102 0.460 2.173
CUR -0.394 0.193 -0.536 -2.039 0.010 0.407 2.460
CDR 0.002 0.001 0.623 2.127 0.053 0.327 3.054
CTR -0.135 0.062 -0.005 -0.022 0.015 0.544 1.838

Source: Appendix V
 50

For the Loan & Advance to Deposit Ratio (LDR), the unstandardized coefficient (B) is
0.311, indicating that a one-unit increase in LDR is associated with a 0.311-unit
increase in ROE. The standardized coefficient (Beta) for LDR is 0.34, suggesting a
moderate positive impact on ROE. However, the significance value (Sig.) for LDR is
0.002, indicating that the relationship between LDR and ROE is statistically significant.
The Variance Inflation Factor (VIF) for LDR is 3.301, indicating no issues of
multicollinearity. This suggests that LDR has a statistically significant moderate
positive impact on ROE.

For the Cash Reserve Ratio (CRR), the unstandardized coefficient (B) is -0.146,
implying that a one-unit increase in CRR leads to a decrease of 0.146 units in ROE.
The standardized coefficient (Beta) for CRR is -0.202, indicating a weak negative
impact on ROE. However, the significance value (Sig.) for CRR is 0.033, suggesting
that the relationship between CRR and ROE is statistically significant. The VIF for
CRR is 2.269, indicating no issues of multicollinearity. Therefore, changes in CRR
have a statistically significant weak negative impact on ROE.

For the NRB Balance to Total Deposit Ratio (NDR), the unstandardized coefficient (B)
is 0.459, suggesting that a one-unit increase in NDR results in a 0.459-unit increase in
ROE. The standardized coefficient (Beta) for NDR is 0.435, indicating a moderate
positive impact on ROE. However, the significance value (Sig.) for NDR is 0.102,
suggesting that the relationship between NDR and ROE is not statistically significant.
The VIF for NDR is 2.173, indicating no issues of multicollinearity. Thus, while NDR
has a moderate positive impact on ROE, its statistical significance is limited.

For the Current Ratio (CUR), the unstandardized coefficient (B) is -0.394, indicating
that a one-unit increase in CUR leads to a decrease of 0.394 units in ROE. The
standardized coefficient (Beta) for CUR is -0.536, indicating a moderate negative
impact on ROE. However, the significance value (Sig.) for CUR is 0.010, suggesting
that the relationship between CUR and ROE is statistically significant. The VIF for
CUR is 2.46, indicating no issues of multicollinearity. Therefore, changes in CUR have
a statistically significant moderate negative impact on ROE.

For the Cash in Hand to Total Deposit Ratio (CDR), the unstandardized coefficient (B)
is 0.002, suggesting that a one-unit increase in CDR leads to a 0.002-unit increase in
ROE. The standardized coefficient (Beta) for CDR is 0.623, indicating a strong positive
 51

impact on ROE. However, the significance value (Sig.) for CDR is 0.053, suggesting
that the relationship between CDR and ROE is not statistically significant. The VIF for
CDR is 3.054, indicating no issues of multicollinearity. Thus, while CDR has a strong
positive impact on ROE, its statistical significance is limited.

For the Current Asset to Total Asset Ratio (CTR), the unstandardized coefficient (B) is
-0.135, indicating that a one-unit increase in CTR leads to a decrease of 0.135 units in
ROE. The standardized coefficient (Beta) for CTR is -0.005, indicating a negligible
impact on ROE. However, the significance value (Sig.) for CTR is 0.015, suggesting
that the relationship between CTR and ROE is statistically significant. The VIF for
CTR is 1.838, indicating no issues of multicollinearity. Therefore, changes in CTR have
a statistically significant negligible impact on ROE.

Major Findings

1. The Loan & Advance to D eposit Ratio (LDR) for Everest Bank Ltd. (EBL) and
Himalayan Bank Ltd. (HBL) ranged from 0.666 to 0.864 and 0.701 to 0.904,
respectively, indicating that both banks maintain a significant portion of their
total deposits in loans and advances. Additionally, Everest Bank Ltd. (EBL) and
Himalayan Bank Ltd. (HBL) exhibited mean Cash Reserve Ratios (CRR) of
15.681% and 28.128%, respectively, suggesting that HBL maintains higher
cash reserves relative to its total deposits compared to EBL. The NRB Balance
to Total Deposit Ratio (NDR) for EBL ranged from 0.064 to 0.206, while for
HBL, it ranged from 0.042 to 0.094, indicating differences in their reliance on
balances held with the Nepal Rastra Bank (NRB).
2. Regarding liquidity, both banks showed similar Current Ratios (CUR), with
EBL averaging 116.4% and HBL averaging 110.9%, suggesting adequate
current assets to meet short-term liabilities. However, their liquidity
management strategies diverged, notably in the Cash in Hand to Total Deposit
Ratio (CDR), where EBL ranged from 11.476% to 40.227% and HBL ranged
from 15.054% to 59.603%. Moreover, their asset compositions differed, as
indicated by the Current Asset to Total Asset Ratio (CTR), with EBL holding
current assets equivalent to approximately 87.3% of its total assets, while HBL
held approximately 96.6%. Despite these variations, both banks demonstrated
comparable levels of profitability, with Return on Assets (ROA) averaging
 52

1.6% and Return on Equity (ROE) averaging 16.2%, suggesting similar

efficiency in generating profits relative to their assets and shareholders' equity.
3. correlations exist between Loan & Advance to Deposit Ratio (LDR) (-0.083)
and Current Ratio (CUR) (-0.286) with Return on Assets (ROA), while positive
correlations are observed for Cash Reserve Ratio (CRR) (0.05), NRB Balance
to Total Deposit Ratio (NDR) (0.185), Cash in Hand to Total Deposit Ratio
(CDR) (0.262), and Current Asset to Total Asset Ratio (CTR) (0.086) with
ROA.
4. Negative correlations exist between Loan & Advance to Deposit Ratio (LDR)
(-0.456) and Current Ratio (CUR) (-0.626) with Return on Equity (ROE), while
positive correlations are observed for Cash Reserve Ratio (CRR) (0.197), NRB
Balance to Total Deposit Ratio (NDR) (0.253), Cash in Hand to Total Deposit
Ratio (CDR) (0.619), and Current Asset to Total Asset Ratio (CTR) (0.243)
with ROE.
5. Loan & Advance to Deposit Ratio (LDR) has a statistically significant moderate
positive impact on Return on Assets (ROA) (B = 0.48, Beta = 0.664, Sig. =
0.044), with no multicollinearity issues (VIF = 3.301).
6. Conversely, the Cash in Hand to Total Deposit Ratio (CDR) exhibits a moderate
positive impact on ROA (B = 0.129, Beta = 0.485), but lacks statistical
significance (Sig. = 0.259), with a VIF of 3.054.
7. Regression Model II reveals a strong positive correlation (R = 0.797) between
liquidity metrics and Return on Equity (ROE), indicating a notable relationship
between the predictors and ROE.
8. Despite demonstrating varying degrees of impact, including moderate positive
and negative influences, the relationship between liquidity metrics such as Loan
& Advance to Deposit Ratio (LDR), Cash Reserve Ratio (CRR), NRB Balance
to Total Deposit Ratio (NDR), Current Ratio (CUR), Cash in Hand to Total
Deposit Ratio (CDR), and Current Asset to Total Asset Ratio (CTR) with Return
on Assets (ROA) lacks statistical significance (Sig. > 0.05), suggesting limited
explanatory power regarding ROA.
9. Regression Model II, with an R Square of 0.635, explains approximately 63.5%
of the variance in ROE, while the Adjusted R Square of 0.466 suggests that
46.6% of the variance is explained after accounting for predictors.
 53

10. Liquidity metrics such as LDR, CRR, NDR, CUR, CDR, and CTR demonstrate
varying impacts on ROE, with some showing statistically significant
relationships (e.g., LDR, CRR, CUR, and CTR) while others do not.
Additionally, VIF values for each metric indicate no multicollinearity issues.

Discussion

The analysis of liquidity and profitability metrics for Commercial Bank in Nepal, as
conducted in this study, reveals satisfactory liquidity positions for both Everest Bank
Ltd. (EBL) and Himalayan Bank Ltd. (HBL), with adequate current ratios indicating
sufficient current assets to meet short-term liabilities. Notable differences in liquidity
management strategies are observed, particularly in metrics such as the Loan &
Advance to Deposit Ratio (LDR) and Cash in Hand to Total Deposit Ratio (CDR).
Despite these differences, both banks exhibit comparable profitability levels, as
evidenced by consistent Return on Assets (ROA) and Return on Equity (ROE) ratios.
These findings suggest that while liquidity management strategies may vary, both banks
have been successful in generating profits relative to their assets and shareholders'
equity. Comparing these results with previous research reveals both similarities and
differences. Khadijat (2024) and Tasie et al. (2024) found significant impacts of
liquidity and liquidity management on financial development and banking viability,
aligning with the importance of liquidity management highlighted in this study.
However, Shrestha and Chaurasiya (2023) and Rehman and Jannat (2023) observed
significant impacts of liquidity indicators on profitability, contrasting with the limited
statistical significance of liquidity metrics observed in this study. Similarly, Erfani and
Heydari (2023) and Abuga et al. (2023) emphasized the significant positive effects of
liquidity management on profitability, contrasting with the absence of statistical
significance in the impact of liquidity on profitability metrics in this study.

The analysis of liquidity and profitability metrics for Commercial Bank in Nepal in this
study reveals several significant correlations between liquidity indicators and
profitability measures. Notably, a weak negative correlation is observed between the
Loan & Advance to Deposit Ratio (LDR) and both Return on Assets (ROA) and Return
on Equity (ROE), contrasting with findings by Khadijat (2024) and Erfani and Heydari
(2023) that highlight significant positive impacts of liquidity management on financial
development and bank profitability, respectively. Additionally, a strong negative
correlation between the Current Ratio (CUR) and both ROA and ROE contrasts with
 54

observations by Zaharum et al. (2022), who noted a positive relationship between the
current ratio and return on assets. Moreover, while this study emphasizes the
importance of liquidity management in influencing profitability, Shrestha (2018) found
liquidity to have an insignificant impact on the profitability of Nepalese commercial
banks. However, similarities are noted with findings by Bagh et al. (2017), who also
identified significant impacts of liquidity metrics on profitability, albeit with some
differences in the specific indicators highlighted.

The analysis of liquidity impact on the profitability of Commercial Bank in Nepal

reveals several noteworthy findings. While the Loan & Advance to Deposit Ratio
(LDR) and the Cash in Hand to Total Deposit Ratio (CDR) display potential positive
impacts on Return on Assets (ROA) and Return on Equity (ROE), their relationships
lack statistical significance, aligning with Joseph and Adelegan (2023) findings of non-
significant relationships between liquidity indicators and bank profitability metrics in
Nigeria. Moreover, the Current Ratio (CUR) exhibits a moderate negative impact on
ROE, echoing Zaharum et al. (2022) observation of a negative correlation between the
current ratio and return on assets, suggesting potential deviations from profitability-
enhancing liquidity metrics. Additionally, while Shrestha and Chaurasiya (2023) found
significant impacts of Total Loans to Total Assets Ratio (TLTAR) on ROA, this study
does not indicate statistical significance for liquidity metrics, possibly indicating
contextual differences in the relationship between liquidity and profitability across
banking environments. Furthermore, the negligible impacts of liquidity metrics on
profitability in Nepal contrast with Erfani and Heydari (2023) findings of a significantly
positive effect of liquidity management on bank profitability, suggesting potential
variations in the effectiveness of liquidity management strategies across different
banking contexts.
 Chapter V
Summary and Conclusion

In this chapter, the dissertation consolidates and summarizes the main findings and
analyses conducted. It provides a brief summary of the insights gained during the study
and highlights their importance within the wider scope of the subject area. Acting as
the concluding chapter of this academic exploration, the conclusion outlines the
practical implications of the research and underscores its value in enriching the existing
understanding within the field.

Summary

The study delves into the crucial interplay between liquidity and profitability in the
context of Commercial Bank operating in Nepal. Liquidity, essential for meeting short-
term financial obligations, and profitability, indicating a company's financial health, are
both vital aspects of effective financial management. However, achieving a balance
between the two presents challenges, as excessive liquidity can stifle innovation, while
inadequate liquidity may hinder meeting immediate financial commitments. Despite
their significance, scholarly research has often overlooked the intricate relationship
between liquidity and profitability. In Nepal, commercial banks face the imperative of
bolstering their liquidity positions amidst constraints on cash flow and credit
availability, emphasizing the need for proactive liquidity management. The study aims
to address key inquiries concerning the status of liquidity and profitability, the
relationship between the two, and the impact of liquidity on profitability in Commercial
Bank in Nepal, with a specific focus on Everest Bank Ltd. and Himalayan Bank Ltd.
By conducting a comprehensive analysis and statistical examination, the research seeks
to contribute valuable insights to banking operations in Nepal, informing stakeholders'
strategic decision-making and risk management practices to enhance financial
performance and stability in the country's banking sector.

The literature review of this study encompasses three main components: conceptual
review, theoretical review, empirical review, and identification of research gaps. In the
conceptual review, the study elucidates the fundamental concepts of liquidity and
profitability within the context of Nepalese commercial banks, emphasizing their
significance in assessing financial health and operational efficiency. Theoretical review
 56

delves into prominent theories such as liability management theory, liquidity preference
theory, shiftability theory, and anticipated income theory, providing theoretical
frameworks to understand liquidity and profitability dynamics. Empirical review entails
a thorough examination of previous articles, journals, books, and dissertations relevant
to the study, highlighting existing research findings and methodologies employed.
Finally, the study identifies research gaps in the literature, indicating areas where
further investigation is warranted. By addressing these gaps, the study aims to
contribute to the existing body of knowledge and provide insights into the relationship
between liquidity and profitability in Nepalese commercial banks.

The research design for this study encompasses a combination of descriptive statistics
and a causal-comparative research design to investigate the impact of liquidity on the
profitability of Commercial Bank in Nepal. Descriptive statistics will be used to
summarize key variables such as liquidity ratios and profitability measures, providing
insights into the current state of liquidity and profitability. Concurrently, a causal-
comparative research design will enable the examination of causal relationships
between liquidity and profitability variables by comparing different groups or
conditions. The population consists of all 20 commercial banks operating in Nepal, with
a sample comprising two prominent Commercial Bank: Everest Bank Ltd. and
Himalayan Bank Ltd., selected through a simple random sampling method to ensure
representativeness and reliability. Secondary data from the published annual reports of
the selected banks for the fiscal years 2013/14 to 2022/23 serve as the primary source
of information, offering detailed insights into liquidity and profitability trends over
time. This quantitative approach ensures rigorous statistical analysis and robust
conclusions while minimizing biases associated with primary data collection,
enhancing the generalizability of findings to the broader population of Commercial
Bank in Nepal.

This study employed a methodical approach to analyze the data collected, utilizing both
Microsoft Excel and SPSS for comprehensive examination. Financial tools such as ratio
analysis were employed to assess liquidity-related independent variables, including
Loan & Advance to Deposit Ratio (LDR), Cash Reserve Ratio (CRR), NRB Balance to
Total Deposit Ratio (NDR), Current Ratio (CUR), Cash in Hand to Total Deposit Ratio
(CDR), and Current Asset to Total Asset Ratio (CTR), alongside dependent variables
of profitability, namely Return on Asset (ROA) and Return on Equity (ROE). Statistical
 57

tools were then utilized for descriptive statistics, encompassing measures like
minimum, maximum, mean, and standard deviation, along with correlation and
regression analyses to evaluate the impact of liquidity on profitability. The research
framework adopted from Shrestha and Jha (2020) focused on assessing the relationship
between liquidity and profitability in foreign Commercial Bank in Nepal, particularly
Everest Bank Ltd. (EBL) and Himalayan Bank Ltd. (HBL), with LDR, CRR, NDR,
CUR, CDR, and CTR as independent variables and ROA and ROE as dependent
variables.

The analysis reveals several key findings regarding the financial performance and
liquidity management of Everest Bank Ltd. (EBL) and Himalayan Bank Ltd. (HBL),
along with their impact on profitability metrics. Both banks maintain a significant
portion of their total deposits in loans and advances, with EBL and HBL showing LDR
ranging from 0.666 to 0.864 and 0.701 to 0.904, respectively. However, they exhibit
differing mean Cash Reserve Ratios (CRR) of 15.681% and 28.128%, respectively, and
NRB Balance to Total Deposit Ratio (NDR) ranging from 0.064 to 0.206 for EBL and
0.042 to 0.094 for HBL. Despite similar Current Ratios (CUR), differences emerge in
liquidity management strategies, particularly in the Cash in Hand to Total Deposit Ratio
(CDR) ranging from 11.476% to 40.227% for EBL and 15.054% to 59.603% for HBL,
and Current Asset to Total Asset Ratio (CTR) indicating 87.3% for EBL and 96.6% for
HBL. However, both banks exhibit comparable levels of profitability, with similar
Return on Assets (ROA) averaging 1.6% and Return on Equity (ROE) averaging
16.2%. Correlation analysis further illustrates relationships between liquidity metrics
and profitability, with LDR, CRR, NDR, CDR, and CTR demonstrating varying
degrees of impact on ROA and ROE. Regression analyses highlight significant
predictors of ROE, with some liquidity metrics showing statistically significant
relationships. Overall, while certain liquidity metrics exhibit significant impacts on
profitability, others lack statistical significance, suggesting limited explanatory power
regarding ROA and ROE. However, Regression Model II provides valuable insights,
explaining 63.5% of the variance in ROE and indicating no multicollinearity issues
among the predictors

Additionally, the analysis of the relationship between liquidity and profitability, as well
as the impact of liquidity on the profitability of Commercial Bank in Nepal, reveals
several significant insights. Firstly, concerning the relationship between liquidity and
 58

profitability, it is evident that certain liquidity metrics exhibit varying degrees of

correlation with both Return on Assets (ROA) and Return on Equity (ROE). The Loan
& Advance to Deposit Ratio (LDR) shows a weak negative correlation with both
profitability measures, suggesting that a decrease in LDR is associated with a decrease
in profitability. Conversely, the Cash Reserve Ratio (CRR), NRB Balance to Total
Deposit Ratio (NDR), and Current Asset to Total Asset Ratio (CTR) demonstrate either
weak positive or moderate positive correlations with profitability, indicating that
increases in these liquidity metrics correspond to higher profitability, although not
always statistically significant. Moreover, the Current Ratio (CUR) exhibits a strong
negative correlation with both ROA and ROE, implying that decreases in CUR are
strongly associated with decreases in profitability. The Cash in Hand to Total Deposit
Ratio (CDR) displays a strong positive correlation with both profitability measures,
indicating that increases in CDR are strongly linked to higher profitability, albeit
without statistical significance in some cases. However, when considering the impact
of liquidity on profitability, the statistical significance of these relationships is limited.
While some liquidity metrics demonstrate potential impacts on profitability, such as the
LDR showing a moderate positive impact on both ROA and ROE, the statistical
significance is lacking, suggesting that other factors may exert a more substantial
influence on profitability in the context of Commercial Bank in Nepal. Therefore, while
liquidity management plays a crucial role in influencing profitability, it is not
necessarily the sole determinant, and further investigation into other factors influencing
profitability is warranted.

This study offers both practical and theoretical implications. Practically, it provides
insights for Commercial Bank in Nepal to enhance their liquidity management
strategies, thereby improving their profitability. Theoretical implications include
contributing to the understanding of the relationship between liquidity and profitability
in the context of Nepalese banking. Recommendations include implementing effective
liquidity management practices, leveraging financial and statistical tools for analysis,
and considering the identified factors affecting profitability for strategic decision-
making.

Conclusion

The first objective of this study has been to examine the status of liquidity and
profitability of Commercial Bank in Nepal. The analysis of liquidity and profitability
 59

metrics for Commercial Bank in Nepal reveals several key findings. Overall, both
Everest Bank Ltd. (EBL) and Himalayan Bank Ltd. (HBL) demonstrate satisfactory
liquidity positions, with adequate current ratios indicating sufficient current assets to
meet short-term liabilities. However, there are notable differences in their liquidity
management strategies, as evidenced by variations in metrics such as the Loan &
Advance to Deposit Ratio (LDR) and Cash in Hand to Total Deposit Ratio (CDR).
While EBL maintains a higher proportion of loans and advances relative to deposits,
HBL holds higher cash reserves. Additionally, disparities in the NRB Balance to Total
Deposit Ratio (NDR) suggest variations in reliance on balances held with the Nepal
Rastra Bank (NRB). Despite these differences, both banks exhibit comparable
profitability levels, with consistent Return on Assets (ROA) and Return on Equity
(ROE) ratios. This indicates that while liquidity management strategies may vary, both
banks have been successful in generating profits relative to their assets and
shareholders' equity. Overall, the status of liquidity and profitability for Commercial
Bank in Nepal appears satisfactory, with opportunities for further optimization in
liquidity management to enhance overall financial performance.

The second objective of this study has been to analyze the relationship between liquidity
and profitability of Commercial Bank in Nepal. The analysis of the relationship
between liquidity and profitability for Commercial Bank in Nepal reveals several
noteworthy findings. Firstly, a weak negative correlation is observed between the Loan
& Advance to Deposit Ratio (LDR) and both Return on Assets (ROA) and Return on
Equity (ROE), indicating that a decrease in LDR is associated with a decrease in both
profitability measures. Conversely, a weak positive correlation is found between the
Cash Reserve Ratio (CRR) and ROA and ROE, suggesting that an increase in CRR is
linked to an increase in profitability. Similarly, a positive correlation is observed
between the NRB Balance to Total Deposit Ratio (NDR) and both ROA and ROE,
indicating that an increase in NDR corresponds to higher profitability. Moreover, a
strong negative correlation exists between the Current Ratio (CUR) and both ROA and
ROE, implying that a decrease in CUR is associated with a significant decrease in
profitability. Conversely, a strong positive correlation is observed between the Cash in
Hand to Total Deposit Ratio (CDR) and both ROA and ROE, indicating that an increase
in CDR is strongly linked to higher profitability. Additionally, a positive correlation is
found between the Current Asset to Total Asset Ratio (CTR) and both ROA and ROE,
 60

suggesting that an increase in CTR corresponds to higher profitability. Overall, these

findings underscore the significance of liquidity management in influencing the
profitability of Commercial Bank in Nepal, with certain liquidity metrics demonstrating
stronger associations with profitability than others.

The third objective of this study has been to analyze the impact of liquidity on the
profitability of Commercial Bank in Nepal. The analysis of the impact of liquidity on
the profitability of Commercial Bank in Nepal reveals several key findings. Firstly, the
Loan & Advance to Deposit Ratio (LDR) shows a moderate positive impact on both
Return on Assets (ROA) and Return on Equity (ROE), although the relationships are
not statistically significant. Changes in the Cash Reserve Ratio (CRR) have negligible
impacts on both ROA and ROE, with no statistical significance. Similarly, the NRB
Balance to Total Deposit Ratio (NDR) demonstrates a moderate positive impact on both
profitability measures, but the relationships are not statistically significant. The Current
Ratio (CUR) shows a moderate negative impact on ROE, but the impact is not
statistically significant, while its impact on ROA is not statistically significant.
Conversely, the Cash in Hand to Total Deposit Ratio (CDR) displays a strong positive
impact on ROE, but again, the relationship lacks statistical significance. Changes in the
Current Asset to Total Asset Ratio (CTR) have negligible impacts on both ROA and
ROE, with no statistical significance. Overall, while some liquidity metrics demonstrate
potential impacts on profitability, their statistical significance is limited, suggesting that
other factors may influence profitability more significantly in the context of
Commercial Bank in Nepal.

Implications

The implications drawn from this study carry substantial practical and theoretical
significance. On a practical level, the findings offer valuable insights for Commercial
Bank in Nepal, informing their liquidity management strategies. By highlighting the
varying impacts of different liquidity metrics on profitability, banks can tailor their
approaches to optimize financial performance while ensuring prudent risk management.
Moreover, the study underscores the importance of considering contextual factors in
liquidity management decisions, emphasizing the need for nuanced strategies aligned
with the specific characteristics of the Nepalese banking landscape. Theoretical
implications arise from enriching the understanding of the relationship between
liquidity and profitability, contributing to the broader literature on banking and finance.
 61

By elucidating the nuanced dynamics at play, the study advances theoretical

frameworks guiding research and policy discussions on liquidity management and
financial performance in emerging markets like Nepal.

Theoretical Implications

This study contributes to the theoretical understanding of liquidity and profitability

dynamics within Nepalese Commercial Bank by applying established financial theories
to a specific context. By exploring theories such as liability management theory,
liquidity preference theory, shiftability theory, and anticipated income theory, this
research offers insights into the underlying principles shaping liquidity management
practices and their impact on profitability outcomes. The analysis of these theories
enhances our comprehension of how banks strategically manage their liquidity
positions to optimize financial performance while balancing short-term obligations and
long-term growth objectives. Additionally, by examining empirical evidence and
theoretical frameworks, this study extends the existing body of knowledge on banking
operations in Nepal, providing a foundation for further research and theoretical
development in the field of financial management.

Practical Implications

From a practical standpoint, this study offers actionable insights for Commercial Bank
operating in Nepal to improve their liquidity management strategies and enhance
overall profitability. By leveraging financial and statistical tools for analysis, banks can
gain a deeper understanding of their liquidity positions and identify areas for
improvement. Practical recommendations arising from this study include the
implementation of effective liquidity risk management practices, such as optimizing
loan-to-deposit ratios, maintaining adequate cash reserves, and diversifying funding
sources. Moreover, banks can utilize the findings to inform strategic decision-making
processes, including capital allocation, investment decisions, and asset-liability
management. By adopting evidence-based approaches derived from the study's
analysis, banks can enhance their financial resilience, mitigate risks, and sustain long-
term profitability in the dynamic banking landscape of Nepal.
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 Appendices

Appendix I Annual Report EBL

FY LDR CRR NDR CUR CDR CTR ROA ROE

2013/14 0.78 16.91 0.15 1.04 30.30 0.95 0.023 0.284
2014/15 0.67 24.27 0.21 1.04 40.23 0.96 0.019 0.228
2015/16 0.72 16.61 0.14 1.05 37.27 0.96 0.016 0.203
2016/17 0.81 16.52 0.15 1.07 31.07 0.95 0.017 0.174
2017/18 0.82 17.75 0.16 1.22 11.48 0.98 0.020 0.160
2018/19 0.86 18.56 0.18 1.25 16.70 0.98 0.019 0.173
2019/20 0.83 14.43 0.14 1.25 13.84 0.98 0.014 0.135
2020/21 0.84 18.15 0.18 1.27 17.48 0.98 0.009 0.086
2021/22 0.84 6.50 0.06 1.226 12.32 0.97 0.011 0.109
2022/23 0.80 7.11 0.07 1.232 12.96 0.03 0.01 0.10

FY Loan and Advance Total Deposit Cash at NRB Cash in Hand

2013/14 48,450,300,000.00 62,108,100,000.00 9,446,921,621.00 2,050,029,487.00

2014/15 55,363,500,000.00 83,093,700,000.00 17,126,155,823.00 2,065,607,611.00

2015/16 67,955,107,021.00 93,735,400,000.00 13,356,018,269.00 2,514,947,575.00

2016/17 77,287,764,142.00 95,094,400,000.00 14,577,083,955.00 3,060,845,724.00

2017/18 94,182,247,596.00 115,511,800,000.00 18,938,747,835.00 10,065,422,666.00

2018/19 112,007,182,134.00 129,568,152,895.00 23,304,568,526.00 7,759,121,374.00

2019/20 119,069,238,189.00 143,545,475,184.00 19,972,674,889.00 10,368,147,712.00

2020/21 135,173,248,173.00 160,220,256,940.00 28,836,572,178.00 9,163,408,289.00

2021/22 145,480,529,033.00 172,739,184,905.00 11,105,032,243.00 14,024,363,708.00

2022/23 159,497,294,513.00 199,227,081,000.00 13,933,794,413.00 15,378,247,980.00

FY Current Assets Current Liabilities Non-Current Assets

2013/14 67,248,992,843.00 64,519,090,385.00 3,196,090,002.00
2014/15 94,701,621,482.00 91,193,583,991.00 4,451,184,535.00
2015/16 109,271,241,463.00 104,299,613,291.00 4,613,804,939.00
2016/17 110,635,815,519.00 103,882,257,046.00 5,874,630,056.00
2017/18 141,769,732,327.00 116,461,629,246.00 3,041,419,116.00
2018/19 166,539,786,086.00 132,829,827,159.00 3,537,747,368.00
2019/20 180,642,108,106.00 144,761,195,854.00 4,381,081,598.00
 2020/21 206,779,962,084.00 163,039,342,106.00 4,870,287,354.00
2021/22 219,426,632,384.00 178,986,391,027.00 5,954,690,150.00
2022/23 243,050,918,399.00 197,266,251,983.00 7,039,574,251.00

FY Net Profit Equity Total Assets

2013/14 1,549,698,561.00 5,457,147,460.00 70,445,082,845.00
2014/15 1,253,291,476.86 5,485,208,116.00 99,152,806,017.00
2015/16 1,730,209,616.33 8,514,088,112.00 113,885,046,402.00
2016/17 2,006,250,326.71 11,544,581,880.00 116,510,445,575.00
2017/18 2,581,679,586.37 16,134,507,415.00 144,811,151,443.00
2018/19 3,054,120,589.85 17,625,063,404.00 170,077,533,454.00
2019/20 2,516,239,522.06 18,637,356,460.00 185,023,189,704.00
2020/21 1,770,939,611.80 20,683,605,466.00 211,650,249,438.00
2021/22 2,429,724,674.00 22,561,775,271.00 225,381,322,534.00
2022/23 3,362,115,439.00 25,271,669,260.00 250,090,492,650.00

Appendix II Annual Report HBL

FY LDR CRR NDR CUR CDR CTR ROA ROE

2013/14 0.70 37.52 0.06 1.07 58.14 0.96 0.01 0.17
2014/15 0.73 30.32 0.08 1.06 54.50 0.97 0.01 0.17
2015/16 0.78 28.74 0.07 1.08 58.29 0.97 0.02 0.25
2016/17 0.82 26.64 0.07 1.09 59.60 0.96 0.02 0.22
2017/18 0.86 23.05 0.05 1.13 21.04 0.97 0.02 0.14
2018/19 0.86 26.25 0.04 1.13 24.28 0.97 0.02 0.18
2019/20 0.81 31.39 0.09 1.14 18.24 0.97 0.02 0.15
2020/21 0.88 26.51 0.05 1.13 16.76 0.97 0.02 0.15
2021/22 0.90 23.48 0.04 1.12 15.05 0.97 0.01 0.11
2022/23 0.82 27.38 0.07 1.14 15.14 0.96 0.00 0.05

FY Loan and Advance Total Deposit Cash at NRB Cash in Hand

2013/14 45,320,359,244.00 64,674,848,295.00 3,766,154,837.00 1,112,465,463.00

2014/15 53,476,229,873.00 73,538,200,185.00 5,873,158,748.00 1,349,261,530.00

2015/16 67,745,978,944.00 87,335,785,849.00 5,677,702,310.00 1,498,347,320.00

2016/17 76,394,259,228.00 92,881,100,000.00 6,141,151,917.00 1,558,322,040.00

2017/18 86,160,212,665.00 99,743,000,000.00 5,159,259,737.00 4,741,359,383.00

2018/19 97,470,071,077.00 113,090,000,000.00 4,883,535,225.00 4,658,553,979.00

2019/20 106,726,542,430.00 131,860,300,000.00 12,407,815,815.00 7,231,138,781.00

2020/21 132,093,945,891.00 149,380,000,000.00 7,535,702,797.00 8,910,941,260.00

2021/22 154,972,823,457.00 171,487,400,000.00 7,133,564,450.00 11,391,809,790.00

2022/23 227,989,493,662.00 278,529,835,080.00 20,235,962,112.00 18,392,307,693.00

FY Current Assets Current Liabilities Non Current Assets

2013/14 70,901,109,531.00 66,406,434,682.00 2,688,736,167.00
2014/15 80,040,981,114.00 75,242,650,988.00 2,760,569,500.00
2015/16 96,409,072,670.00 89,439,239,952.00 3,453,935,410.00
2016/17 103,238,910,225.00 94,910,283,213.00 4,016,569,741.00
2017/18 112,737,973,410.00 99,752,154,743.00 3,724,327,970.00
2018/19 128,836,742,814.00 113,657,329,421.00 4,314,399,259.00
2019/20 151,064,958,733.00 132,091,530,696.00 4,819,960,250.00
2020/21 172,847,595,660.00 152,460,248,330.00 5,643,330,226.00
2021/22 208,738,674,577.00 186,320,994,226.00 7,547,599,097.00
2022/23 319,262,959,221.00 281,054,100,821.00 13,129,940,786.00

FY Net Profit Equity Total Assets

2013/14 959,107,241.00 5,692,031,103.86 73,589,845,698.00
2014/15 1,112,285,716.00 6,519,845,932.00 82,801,550,614.00
2015/16 1,935,907,634.00 7,892,000,138.61 99,863,008,080.00
2016/17 2,178,234,893.00 10,093,766,881.37 107,255,479,966.00
2017/18 1,875,610,467.00 14,138,896,995.00 116,462,301,380.00
2018/19 2,743,868,475.00 15,994,798,380.00 133,151,142,073.00
2019/20 2,586,722,710.00 17,589,253,612.00 155,884,918,983.00
2020/21 2,998,623,045.00 20,132,713,390.00 178,490,925,886.00
2021/22 2,367,538,235.00 22,010,195,996.00 216,286,273,674.00
2022/23 1,562,817,944.00 33,630,369,815.00 332,392,900,007.00