CHAPTER-I

INTRODUCTION

1.1Background

Liquidity is a financial term that means the amount of capital that is available for
investment. Today most of this capital is credit, not cash. Bank Liquidity simply
means the ability of the bank to maintain sufficient funds to pay for its maturing 5
obligations. It is the bank’s ability to immediately meet cash, cheques, other
withdrawal obligations, and legitimate new loan demand while abiding by existing
reserve requirements. Nwaezeaku (2006) defined liquidity as the degree of
convertibility to cash or those with which any asset can be converted to cash.

Liquidity means the allocation of funds in close relation to their respective sources.
Liquidity is the status and part of the assets which can be used to meet the obligation
in the commercial banks. Liquidity can be viewed in terms of liquidity stored in the
balance sheet and in terms of liquidity available through purchased funds. Liquidity is
the ability of a bank to pay cash to depositors on demand. It is the arrangement and
the allocation of funds in such a way that can be drawn immediately without any loss
of principle. At present, there is no secured investment opportunity for the Nepalese
commercial banks. The banks are facing the problem of vague liquidity in term of
monetary firm. The idle money does not make any return. Therefore, the high
liquidity may cause low profitability and inefficient performance of the overall
Banking sector. It may cause failure of banking performance in long term (Pandey,
2000).

Liquidity ratio expresses a company's ability to repay short-term creditors out of its
total cash. It is the result of dividing the total cash by short-term borrowings. It shows
the number of times short-term liabilities are covered by cash. If the value is greater
than 1.00, it means fully covered. Meanwhile, in determining the firm's liquidity, the
finance manager also need to take into account the firm's working capital
management, which basically means managing the firm's current assets and current
liabilities at satisfactory level. Generally, in a balance sheet, current assets consist of
raw materials, work in progress, finished goods or inventories, account receivables,
cash and bank balances etc. Generally, current liabilities comprise of account payable,

1
accrued wages, taxes and other expenses payable and short-term debt (Banerjee,
2014).

Financial institution refers to a business concern, which is mainly confined to finance

for the development of the trade, commerce and industry. Trade, commerce and
industry are the prime factors of the economic development. Bank is a financial
institution, which primarily deals in borrowing and lending. Banking is a vital part of
national economy and a vehicle for the mobilization of economy's financial resources
and extension of credit to the business and service enterprises. The growth of banking
in Nepal is not so long in comparison with other developed or developing countries.
Nepal had to wait for a long time to come to the present banking system. The
development of any country cannot be imagined without economic activities.

1.2Profile of Organization

The Agricultural Development Bank of Nepal was established in 1968 with the goal
of offering credit to support the agricultural sector's production and productivity. It
replaced the Cooperative Bank and merged with the Land Reform Savings
Corporation in 1973. The bank has undergone several amendments to its Act,
allowing it to extend credit to small farmers, promote cottage industries, and engage
in commercial banking activities. The bank has been a prominent rural credit
institution, contributing substantially to agricultural credit supply in Nepal. Since
1984, the bank has also been involved in commercial banking operations to provide
commercial banking services. The enactment of the Banks and Financial Institutions
Act in Nepal abolished all previous acts related to the bank and other financial
institutions, leading to the bank's registration under the Companies Act in 2006.

The bank has a history of over 53 years and is one of the leading commercial banks in
Nepal. It has over 1.2 million satisfied customers and is present in all 7 provinces and
77 districts of the country. The bank's main focus is to promote rural agriculture,
productive, and deprived sectors while providing comprehensive banking services
with a complete banking solution. The bank aims to support the government's
objective of achieving a "Prosperous Nepal, Happy Nepali."

2
1.3 Objectives of the Study

The objective of the study is to evaluate the financial performance of Agricultural

Development Bank with the help of ratio analysis and other measuring tools. Besides,
the following objectives are to support the evaluation and comparison of efficiency
and progress of this bank:

i. To determine whether the bank is able to maintain adequate liquid assets or not.
ii. To analyzethe liquidity position of the bank.

1.4 Significance of the Study

This report has been created to analyze the liquidity status of the Agricultural
Development Bank, covering data from 2074/75 to 2078/79.

 The aim of this report is to observe the trends in the bank's liquidity position
during those periods, as well as to assess the bank's ability to meet short-term
obligations and current maturity obligations. Additionally,
 The report will evaluate the bank's liquidity and identify any areas where
corrective actions may be necessary.
 This project will also provide insights into the financial performance of the
Agricultural Development Bank and serve as a reference for future studies on
related topics.
 The findings of this study may be useful for the institution and other firms to
develop practical and scientific policies and strategies.
 It would beneficial toward the other stakeholder.
1.5 Review

In this chapter, the theoretical aspects of the financial analysis of ADBL are explored
in a detailed and descriptive manner. To conduct this study, various journals, articles,
and research reports related to the topic were reviewed. Additionally, all relevant
books on this topic were consulted. Prior reports by BBS students on this subject were
also analyzed.

1.5.1 Theoretical Review

Liquidity is one of the delicate factors or components in the bank. Liquidity is the
ability to turn assets into cash. It refers to how quickly assets can be converted into

3
cash. The bank can quickly turn many different assets into cash. such as having cash
on hand, having cash in a bank or central bank, or investing in government bonds.
However, some assets, such as loans and fixed assets, are challenging to convert into
cash.

The central bank's responsibility as the last resort lender became more important and
liquidity was believed to exist outside of the banking system. Additionally, the
strength of the banking system became closely linked with the overall health of the
economy because economic conditions directly impacted the ability of bank
borrowers to repay their loans. The shiftability theory continued to be relevant, but
was revised to include the concept that ultimate liquidity in bank loans was dependent
on the Federal Reserve Banks. This new framework required banks to maintain high-
quality assets in their loan portfolio to ensure their intrinsic soundness. (Allen and
Gale, 2004)

Liquidity management is an inescapable daily task in banking because there are many
examples where the banks are defaulted in such cases. So today banks appoint
liquidity managers for the liquidity management. A bank's liquidity can be viewed
with framework of demand and supply. The bank's net liquidity position is the
difference between supply of liquidity flowing into bank and demand on the bank for
liquidity (Crowther, 1996).

1.5.2 Review of Previous Works

Ohison (2004) found that the size of inventory directly affects working capital and its
management. Suggested that inventory was the major component of working capital,
and needed to be carefully controlled.

Fredrick (2012) analyzed the impact of liquidity management on the financial

performance of commercial banks in Kenya. The study has used CAMEL model as a
15 proxy for liquidity management. The author found that the strong impact of
CAMEL (credit risk components) on the financial performance of commercial banks.

Begum (2016) investigated the relationship between banks' liquidity and profitability
and the impact of liquidity on bank's profitability. The paper applies the ordinary least

4
square (OLS) method for the sample period from 1997 to 2014 to examine the impact
of liquidity on banks' profitability. The paper finds that the advance deposit ratio
positively impacts banks' profitability while profitability is defined as return on asset
(ROA). Call money rates, non performing loans (NPLs), and excess liquidity impact
banks' profitability in a negative fashion. The negative relationship between NPLs and
ROA has been a major concern for the policymakers in the banking industry of
Bangladesh since NPLs in the banking sector have increased during the last three
years in the post 2011 period.

Shing & Shahid (2016) investigated that how well the banking sector of Oman is
managing their liquidity risk by comparing them with some of the leading
multinational banks. The liquidity ratios are used to compare the liquidity risk of 22
domestic banks with the multinational banks. Frequently used liquidity ratios were
calculated and compared for the period of three years from 2012 to 2014 using
descriptive and analytical approach. On the basis of liquidity ratios the two domestic
banks of Oman are weak in liquidity management as compared to their international
counterpart .However, Central bank of Oman monitors the liquidity reports of each
bank, policies are reviewed and approved by the risk committee of banks. Moreover,
the Omani local banks also frequently conduct stress testing based on the market
situations and bank conditions as per the standard laid down by the Basel Committee.

Davronov (2016) studied the existing mechanisms of liquidity management in

practice of commercial banks in Uzbekistan. In addition, it presents description and
23 grouping of theoretical approaches to the liquidity management in commercial
banks. He also formulated main requirements to the mechanism of liquidity
management process. Moreover, it proposes and demonstrates the results of testing
mathematical model of analysis and forecast of bank cash flows which is based on
ARIMA method. It should be noted that the model, proposed in the article, cannot
entirely optimize the activity of the bank and minimize risks of liquidity management.
On the one hand, it is connected with the fact that the forecast for future cash flows of
the bank is made with the certain probability. Thus if we raise the time series, the
reliability of the results will be decreased.

5
1.6 Research Methodology

The process of solving a problem in a planned and systematic way by collecting,

analyzing, and interpreting data is called research methodology. It involves
determining the nature and sources of data, as well as the presentation and analysis
techniques. Research methodology also encompasses the methods used to collect data
and the sources from which the data is obtained. Additionally, it covers the tools used
for analyzing the data. Essentially, research methodology refers to the specific
techniques or procedures used to identify, select, process, and analyze information
about a given topic. In a research paper, the methodology section is essential because
it allows readers to evaluate the validity and reliability of the study. This section
answers two main questions: how was the data collected or generated, and how was it
analyzed?

1.6.1 Research Design

The study design enables the researchers to take the proper actions and move in the
direction of the predetermined objectives and aims. A research design is an
arrangement of parameters for data collecting and analysis that balances procedural
economy with relevance to the study goal. The framework, structure, and strategy of
an investigation known as research design envisions finding answers to research
questions and managing various variables. The descriptive research design has been
used in this study.

Kerlinger (1983) illustrated that research design is the plan, structure, and strategy of
the investigation conceived so as to obtain answer to research questions and to control
variance.
.

1.6.2 Population and Sample

There are 21 commercial banks functioning in Nepal, and among them, ADBL has
been chosen as a sample for the study. The data acquired for the study has been
evaluated using a variety of financial techniques.

1.6.3 Sources and collection of data

Here secondary data has been used for this study. The main sources of secondary data
are quarterly and annual financial reports, official records, websites, brochures,

6
prospectus and other relevant publication of ADBL. From these sources the relevant
historical data are gathered for analysis purpose.

1.6.4 Tools Used

(I) Financial Tools

In this field works study, mainly following ratio analysis tools are applied to measure
the financial efficiency of ADBL Ltd.

a. Current ratio
b. Quick Ratio
c. Cash and bank balance to deposit ratio
d. Working capital

1.7 Limitation of the Study

This study is simply conducted for the partial fulfillment of the requirement for the
degree of the bachelor in business studies (BBS). And only the secondary data is used
and analyzed which could not disclose the actual result. And being the first endeavor,
the report can comprise some mistakes which may cause to misinterpretation of the
results.

The other limitation of the study is listed below:

i. The study has been based on secondary data only.

ii. Study has been focused on the financial performance of ADBL with the
help of financial tools.
iii. This study was limited on quantitative analysis which does not consider on
qualitative variable.
iv. No comparison has been made with other commercial bank.
v. The conclusion drawn up from this study may or may not be applicable to
other commercial bank in Nepal.
vi. For the forecast of the liquidity requirement, daily and monthly data is
needed. But due to time and cost constraints, only the annual data is used
for analysis.

7
 CHAPTER-II
RESULT AND ANALYSIS OF DATA

2.1 Data Presentation and Analysis

Finally data shows the actual performance of the bank. Bank performs various
monetary activities which are recorded on daily basis. The main purpose of liquidity
ration analysis is to measure the actual performance of the bank and find various
solutions to meet the expected performance of the bank which the bank promises to
deliver to its customers, NRB and other concern parties. Financial data covers various
financial aspects like bank profit ratio, liquidity ratio, position of share value related
to market shares. We use here five-year data i.e.,(2074/75 to 2078/79) because it is
not possible to take all the past data.

2.1.1 Current ratio

Current ratio is also known as short-term solvency ratio or working capital ratio. The
current ratio is a liquidity ratio that measures a company's ability to pay short-term
obligations or those due within one year. It tells investors and analysts how a
company can maximize the current assets on its balance sheet to satisfy its current
debt and other payables.

Current ratio is calculated by using following formula:

CurrentAssets
Current Ratio =
CurrentLiabilities

Where,

Current Assets = Cash + Balance with NRB + money at call and short notice balance
with bank and financial institution + loan advance and bills publish + outside the bank
assets.

Current Liabilities = loans and borrowing + deposit liabilities + bills payable + other
liabilities.

8
 Table 2.1
Current ratio of Agricultural Development Bank Ltd.
(In Rs. Crores)

Fiscal Year Current Assets Current Current Ratio

Liabilities (times)

2074/75 107016.31 94973.87 1.12

2075/76 117325.34 114517.53 1.02

2076/77 133706.33 121758.11 1.09

2077/78 158791.57 150063.22 1.05

2078/79 169432.96 152098.34 1.11

Sources: Annual report of ADBL from 2074/75 to 2078/79.

Figure 2.1
Simple Bar Diagram on Current Ratio of ADBL Ltd.
1.14

1.12

1.1

1.08

1.06
Times

1.04

1.02

0.98

0.96
2074/75 2075/76 2076/77 2077/78 2078/79
Fiscal Year

Table and figure 2.1 shows that the current assets of Agricultural Development Bank
has always been Superior to the current liabilities for the study period of five year

9
from 2074/75 to 2078/79. The bank has highest current ratio is 1.12 times in 2074/75
and lowest current ratio is 1.02 in 2075/76. Current ratio of Agricultural Development
Bank is fluctuating and able to pay its Current liabilities.

2.1.2 Quick Ratio

The quick ratio is an indicator of a company's short-term liquidity, and measures a

company's ability to meet its short-term obligation with its most liquid assets. Because
we're only concerned with the most liquid assets, the ratio excludes inventories and
prepaid expenses from current assets. Quick ratio is calculated as follows:

Quick Assets
Quick ratio =
Current Liabilities

Table 2.2
Quick ratio Agricultural Development Bank
(In Rs. Crores)
Fiscal Year Quick Assets Current Quick Ratio
Liabilities (times)
2074/75 104901.90 94973.87 1.1045
2075/76 115891.11 114517.53 1.0119
2076/77 129663.55 121758.11 1.0649
2077/78 154922.62 150063.22 1.0323
2078/79 166110.29 152098.34 1.0921
Sources: Annual report of Agricultural Development Bank

Figure 2.2
Trend Line on Quick Ratio of Agricultural Development Bank

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 1.12
1.1
1.08
1.06
1.04
times
1.02
1
0.98
0.96
2074/75 2075/76 2076/77 2077/78 2078/79
Fiscal Year

Table 2.2 and Figure 2.2 shows that the quick ratio of fiscal year 2074/75 is 1.1045
which is highest than other fiscal year. The quick ratio of fiscal year 2075/76 is
1.0119 which is lowest among all of the fiscal year. It means that the bank’s ability to
pay their short-term obligation back with their short-term assets. Quick ratio of
Agricultural Development Bank is on fluctuating trend.

2.3 Cash and Bank balance to Deposit Ratio

This ratio is pay of liabilities and is also called as cash reserve (as specified by NRB).
This ratio can be calculated by dividing cash and bank balance by deposit liabilities of
the bank. The ratio shows the proportion of cash and bank balance to deposit.

Cash∧bank balance
Cash and bank balance deposit ratio =
Deposit liabilities

Table 2.3
Comparable of cash and bank balance to deposit ratio
(In Rs.'Crores')

Cash and bank

Cash and bank balance to deposit
Year balance Deposit liabilities Ratio
(times)

11
 2074/75 15320.58 119221.6 0.1285
2075/76 18924.92 141217.9 0.1340
2076/77 24138.34 149580.9 0.1613
2077/78 29363.32 158910.7 0.1847
2078/79 34550.85 169932.4 0.2033

Sources: Annual report of Agricultural Development Bank from 2074/75 to 2078/79

Figure 2.3

Trend Line on Cash and bank balance to deposit ratio

0.25

0.2

0.15
Times

0.1

0.05

0
2074/75 2075/76 2076/77 2077/78 2078/79

Fiscal Year

Table and Figure 2.3 shows that the cash and bank balance of Agricultural
Development Bank has always been inferior to the deposit liabilities for the study
period of five year from 2074/75 to 2078/79. The bank has highest cash and bank
balance to deposit ratio is 0.2033 times in 2078/79 and lowest cash and bank balance
to deposit ratio is 0.1285 times in 2074/75.Cash and bank to deposit liabilities ratio is
in increasing trend over the fiscal year.

12
2.1.4 Net Working Capital

Net working capital (NWC) is the difference between a company's current assets and
current liabilities. A positive net working capital indicates a company has sufficient
funds to meet its current financial obligations. It is sometime used as a measure of
firm's liquidity.

Net working capital = Current assets−Current liabilities

Table 2.4
Status of Net Working Capital
(In Rs. Million)

Fiscal Year Current Assets Current Net Working

Liabilities Capital
2074/75 107016.31 94973.87 12042.44

2075/76 117325.34 114517.53 2807.81

2076/77 133706.33 121758.11 11948.22

2077/78 158791.57 150063.22 8728.35

2078/79 169432.96 152098.34 17334.62

Sources: Annual report of Agricultural Development Bank from 2074/75 to 2078/79

Figure 2.4
Trend Line on Working Capital of Agricultural Development Bank

13
 20000
18000
16000
14000
Working Capital

12000
10000
8000
6000
4000
2000
0
2074/75 2075/76 2076/77 2077/78 2078/79
Fiscal Year

Table and Figure 2.4 shows that the net working capital of ADBL was positive so that
ADBL was able to pay their short-term obligations. This indicates good financial
health for a ADBL. Net working capital of Agricultural Development Bank is
fluctuating over the fiscal year 2074/75 to 2078/79. The Highest Working Capital of
Agricultural Development Bank on 2078/79 i.e., Rs.17334.62 Crores and the lowest
working capital of ADBL on 2075/76 i.e., Rs. 2807.81 Crores

2.2Finding of the Study

1) The current assets of Agricultural Development Bank has always been
Superior to the current liabilities for the study period of five year from
2074/75 to 2078/79. The bank has highest current ratio is 1.12 times in
2074/75 and lowest current ratio is 1.02 in 2075/76.
2) Current ratio of the Agricultural Development Bank is fluctuating and is able
to pay its Current liabilities.
3) The Current assets of ADBL are higher than the current liabilities during the
study period.
4) The cash and bank balance of Agricultural Development Bank has always
been inferior to the deposit liabilities for the study period of five year from
2074/75 to 2078/79.

14
 5) Cash and bank-to-deposit liabilities ratio is in increasing trend over the fiscal
year.
6) The quick ratio of fiscal year 2074/75 is 1.1045 which is highest than other
fiscal year. The quick ratio of fiscal year 2075/76 is 1.0119 which is lowest
among all of the fiscal year
7) The net working capital of ADBL was positive so that ADBL was able to pay
their short-term obligations.
8) The Highest Working Capital of Agricultural Development Bank on 2078/79
i.e., Rs.17334.62 Crores and the lowest working capital of ADBL on 2075/76
i.e., Rs. 2807.81 Crores.
9) Net working capital of Agricultural Development Bank is fluctuating over the
fiscal year 2074/75 to 2078/79.

CHAPTER-III
SUMMARY AND CONCLUSION

3.1 Summary

The purpose of the study was to assess the bank's liquidity position and determine if it
had sufficient liquid assets. The study primarily relied on secondary data and
collected relevant information from various sources. Out of the 21 commercial banks
in Nepal, the ADBL was chosen as the sample and various financial tools were used
to analyze the collected data. The analysis focused on current assets such as cash
balance, balance with NRB, balance with other banks and financial institutions,
money at call and short notice, loan, advance, and bills purchase. Additionally,
current liabilities were also examined, including loans and borrowing, deposit
liabilities, bills payable, and other liabilities.

15
The liquidity ratio of Agricultural Development Bank was found to be higher than the
standard liquidity ratio of 2:1, indicating that the bank is able to meet its short-term
obligations. This suggests that the Agricultural Development Bank is in good
financial health.

3.2 Conclusions

In conclusion, the analysis of the data and diagrams indicates that the bank is capable
of fulfilling its short-term obligations and appears financially strong. Although the
current ratio of Agricultural Development Bank fluctuates, it is able to meet its short-
term obligations. The bank's management efficiency is good in terms of asset
management but could be improved by investing more in profitable sectors. While the
bank is successful in collecting deposits, it seems less successful in utilizing the
collected funds for lending purposes.

References

Allen and Gale,(2004) Essentials of Managerial Finance. USA: University

Publishers.
Begum,(2016). Banking theory and practice. Eighteen Revised Edition.
Crowther,(1996). Business statistics and mathematics. Kathmandu: M.K. Publishers
and Distributors
Davronov,(2016). Social Science Research: Theory and Principles. Nairobi: Acts
Press.
Fredrick,(2012). Liquidity Risk and Interest Rate Risk on Banks: Are They Related?
The IUP Journal of Financial Risk Management, vol. 9(4), pp. 27-51.
kerlinger,(1983).Liquidity Risk and its Management in Lithuanian Banking System.
Science: Future of Lithuania, vol. 6(1), pp. 64-71.

16
 Kothari, C. (2009). Reach methodology. New Delhi: Mc. Grow Hill company second
company second edition.
Kumar, M. & Yadav, G.C. (2013). Liquidity Risk Management in a Bank: A
Conceptual Framework. AIMA Journal of Management & Research. PP.0974
– 497
Ohison,(2004). Fundamental ofFinancial Management. Kathmandu: Ashmita Book
Publisher.
Saadaoui, A. & Boujelbene, Y. (2014). Liquidity and credit risk in the emerging
financial markets. Public Finance Quarterly, vol. 59(2), pp. 207-219.
Singh, D.R. &Shahid, I.M. (2016). Liquidity Management: A Comparative study of
Oman Banks and Multinational Banks. International Journal of Applied
Sciences and Management, vol. 1(2), pp. 157-170

APPENDICES
Balance Sheet of ADBLF.Y 2074/75 to 2078/79
(In Rs.Crores)
Capital & Liabilities F.Y. F.Y. F.Y. F.Y. F.Y.
2074/75 2075/76 2076/77 2077/78 2078/79
Share capital 9548.47 10588.67 11858.32 13904.26 15354.52
Reserve and Surplus 2113.25 2417.28 3895.06 4402.35 5920.36
Debenture and Bonds - - - - -
Loan and borrowing 1305.3 1243.8 1592.47 1733.50 1145.43
Deposit Liabilities 119221.6 141217.9 149580.9 158910.7 169932.4
Bills Payable 214.87 152.8 142.08 5384.50 1721.98
Proposed Dividend - - - - -
Income Tax Liabilities - - - - -

17
 Other Liabilities 6323.5 2521.5 8745.2 4594.93 4928.90
Total Capital & 142986.10 159843.20 177283.42 187234.92 199003.59
Liabilities
Assets F.Y. F.Y. F.Y. F.Y. F.Y.
2074/75 2075/76 2076/77 2077/78 2078/79
Cash in hand 15320.58 18924.92 24138.34 29363.32 34550.85
Balance with NRB 8790.16 13720.08 15836.6 17635.49 20567.29
Balance with other banks 1623.84 2235.06 3511.35 4045.98 5133.28
and financial institution
Money at call and short 450.00 296.00 180.00 536 783
note
Investments 35310.27 43768.3 48276.47 44469.63 51221.64
Loan, Advance and Bills 72079.28 81778.17 102161.55 117414.16 124268.49
Purchase
Fixed Assets 524.20 512.06 692.42 919.04 967.98
Current tax assets 135.32 253.57 457.90 624.46 865.23
Other Assets 8752.45 11634.18 11817.76 10266.69 12543.71
Total Assets 142986.10 159843.20 177283.42 187234.92 199003.59

18