WORKING CAPITAL MANAGEMENT OF COMMERCIAL BANKS IN NEPAL

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

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

A Thesis Submitted to: Office of the Dean Faculty of Management Tribhuvan University

In partial fulfillment of the requirement for the degree of Master of Business Studies (MBS)

Kathmandu, Nepal September 2013

RECOMMENDATION
This is to certify that the thesis

Submitted by:

Rajaram Joshi

Entitled:

WORKING CAPITAL MANAGEMENT OF COMMERCIAL BANKS IN NEPAL

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

has been prepared as approved by this Department in the prescribed format of the Faculty of Management. This thesis is forwarded for examination.

....... Joginder Goet

(Thesis Supervisor)

......
Prof. Dr. Kamal Deep Dhakal (Head, Research Department)

.....
Asso. Prof. Prakash Singh Pradhan (Campus Chief)

VIVA-VOCE SHEET
We have conducted the viva voce of the thesis presented
by:

Rajaram Joshi
Entitled:

WORKING CAPITAL MANAGEMENT OF COMMERCIAL BANKS IN NEPAL

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

And found the thesis to be the original work of the student and written According to the prescribed format. We recommend the thesis to be accepted as partial fulfillment of the requirement for the degree of Master of Business Studies (MBS) Viva-Voce Committee Head, Research Department .

Member (Thesis Supervisor)

Member (External Expert)

DECLARATION

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

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

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

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

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

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

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

Rajaram Joshi

ABBREVIATIONS
A/P A/R AD ATM BS CA CL CR CRR CV e.g. EBL EOQ F/Y FA GDP GWC HBL i.e. NABIL NEPSE NIBL NIC NL NLO NPAT NRB NTL NWC = = = = = = = = = = = = = = = = = = = = = = = = = = = = = Accounts Payable Accounts Receivable Anno Domini Automatic Taller Machine Bikram Sambat Current Assets Current Liabilities Current Ratio Cash Reserve Ratio Coefficient of Variation Example Everest Bank Limited Economic Order Quantity Fiscal Year Fixed Assets Gross Domestic Product Gross Working Capital Himalyan Bank Limited That is Nabil Bank Limited Nepal Stock Exchange Nepal Investment Bank Limited Nepal Insurance Company Nepal Lever Ltd Nepal Lube Oil Ltd Net Profit after Tax Nepal Rasta Bank National Trading Limited Net Working Capital

PE PEs QR ROE ROI SCT SD SLR TA TU UAE VDC WC

= = = = = = = = = = = = =

Probable Error Public Enterprises Quick Ratio Return on Equity Return on Investment Smart Choice Technology Standard Deviation Statutory Liquidity Ratio Total Assets Tribhuvan University United Arab Emirates Village Development Committee Working Capital

CHAPTER - I INTRODUCTION
1.1 Background of the Study

As a developing country, Nepal is striving to develop and modernize economy rapidly on rational and socially desired footings but the structure of the economy is largely dominated by agriculture with very small industry base, so to divert and modify agro-based economy, Nepal adopted mixed economic model with implicit objective to help the state and private sector economy that complement each other in the development process from very inception of economic planning process back in 1956. The primary goal of the developing country like Nepal is to develop economy rapidly and to promote the welfare of the people and nation. So, very recently, Nepal has adopted the path of economic liberalization for the sake of the economic growth of the nation. After the restoration of the democracy, the concept of liberalization policies has been incorporated as directive principal and state policies (The Constitution of the Kingdom of Nepal, 1990: 14-17). Development of trade, commerce and industry are the prime requisite for the attainment of the economic, political and social goals. To fulfill the purpose of planning, financial functions more often dominates the other functions. There is always lack of finance in underdevelopment economy because natural resource are either underutilized or unutilized in productive sectors or even other purposes i.e.; social welfare and so on. Likewise, underdeveloped countries are not deficient in land, water, mineral, forest or power resources, thought they may be untapped; constituting only potential resources. And in the underdevelopment countries like Nepal there is always lack of financial resources not only because of its real absence but because of the available resource are not properly mobilized and are not fully utilized for the productive purpose.

So, for the rapid economic development in the underdevelopment countries like Nepal there should be proper utilization of resources. Due to various difficulties or even ignorance of the people, such resources have not been properly utilized. Hoarding could be one of the reasons for this. So, financial institutions pay a vital role of encourages thrift and discourage hoardings by mobilizing the resources and removing the habits of hoarding. They pursue rapid economic growth, development the banking habit among the people, collecting the small-scattered resources in one bulk and utilizing them in further productive purposes and rendering other valuable services to the country. Thus, this gives the individuals an opportunity to borrow funds against future income, which may improve the economic well begin of the borrower. In this course the banks play the most important role in modern economic organization. Their business mainly consists of receiving deposits, giving loans and financing the trade of a country. They provide short-terms credit i.e. lend money for short periods. Bank is the main financial institution, which plays an important role in the economic development of the nation. It is the backbone as well as the foundation for the development of the country. Its principal operations are concerned with the accumulation on the temporary idle money of the public for advancing others for expenditures. In other words, Bank is an institution that deals in money and its substitutes and provides other financial services. Banks accept deposit and make loans and derive a profit from the difference in the interest rates paid and charged, respectively. Depositors may be either individual or institutions. These deposits may be current, saving or fixed and the tenure depends upon the mutual agreements between the bank may be either an individual or institutions. The tenure of the loan may vary as per the demand, criteria and the usefulness of the loan. Some banks also have the power to create money. The principal types of banking in the modern industrial world are commercial banking and central banking. A commercial banker is a dealer in money and in substitutes for money, such as checks or bills of exchange. The banker also

provides a variety of other financial services. The basis of the banking business is borrowing from individuals, firms, and occasionally i.e., receiving deposits from them. With these resources and also with the banks own capital, the banker makes loans or extends credit and also invests in securities. The banker makes profile by borrowing at one rate of interest and lending at a higher rate and by charging commissions for services rendered. Commercial banks are

the major financial institutions that occupy quite an important place in the framework in the economy development sectors as well as in saving and investment sectors. Commercial banks are suppliers of finance for trade and industry and play a vital role in the economic and financial life of the country. They also provide an opportunity in the development of individual industries, trade and business organization by investing savings and collected deposits. By investing the saving and collected deposits in the productive sectors, they help in the formation of capital. Besides they also render numerous services to its customers in a view of providing facilities to theirs economic and social life in the community. A bank must always have cash balances on hand order to pay its depositors upon demand or when the amounts credited to them due. It must also keep a proportion of its assets in forms that can readily be converted into cash. Only in this way the confidence in the banking system can be maintained. Working Capital is the lifeblood of the organization. To sustain the belief of the people & customer, the organization should always get ready to meet the obligations. Working capital management is the crucial aspect of the financial management. It is the Life-blood and controlling nerve center for any types or business organization because without the proper control upon it no business can run smoothly. The management of current assets and current liabilities is necessary for daily operations of any organizations. Thus, it plays the vital role in the success and failure of the organizations as it deal with the part of assets, which are transformed from one form to another form during the course of manufacturing cycle. Therefore, the role of working capital management is more significant for every business organization irrespective to their nature.

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

1.1.1History of Banks in Nepal

Talking about the history of bank, an institutional banking system came into existence in Nepal only in the 19th century. Nepal Bank Limited was the first financial institutional of Nepal established on the 30th of Kartik 1994. Being a commercial bank, it focuses on income generating and profit maximization. As it was only one commercial bank, it has to look the economic condition of country. Only one Nepal Bank Limited was not sufficient to look all the sector of country. So in 2013 B.S. another bank named Nepal Rastra Bank was established as the central bank. Similarly the 2nd commercial bank Rastriya Banijya Bank was established as the second commercial bank of Nepal in Magh 10, 2022 B.S., under Rastriya Banijya Bank Act 2021. This act is now revised as Commercial Bank Act 2031. B.S. Accepting deposits, granting loan and performing commercial banking functions are the main motto of commercial bank (Commercial Bank Act, 2031). For the development of industry, commerce and trade, Nepal Industrial Development Corporation was established under Industrial Development Corporation Act 2016. For the development of agricultural section, Agricultural Development Bank was established on Magh 7th 2024 B.S., under the Agricultural Bank Act 2024 B.S. The government of Nepal observed the necessities of rapid development of the country for which it has adopted liberalized economic policy, laissez fair economy and encouraged foreign investment. The government formed Foreign Investment & Technology Act 1981 A.D. which was later revised as Act 1992 A.D. by new elected democratic government(Foreign Investment

and Technology Act, 1992). The joint venture bank was introduced in Nepal in 2041 B.S. with the establishment of Nepal Arab Bank Limited. It was established with joint venture of U.A.E bank, financial institution of Nepal. The second joint venture bank, Nepal Indosuez Bank Limited was established in 6th Magh 2042 B.S. Similarly, others joint venture banks like, Nepal Grindlays Bank Limited on 16th Marg 2043, Himalayan Bank Limited on 2049 B.S., Nepal State Bank of India Limited on 2050 B.S., Nepal Bangladesh Bank Limited on 2051 B.S., Everest Bank Limited on 2051 B.S., Bank of Kathmandu on 2052 B.S. and Nepal Bank of Celon Limited on 2052 B.S. have been established. Till now other commercial banks have been also established. Among them majority of banks are established in joint venture banks. A joint venture is the joining of forces between two or more enterprises for the purpose of carrying out a specific operation industrial or commercial investment, production or trade (Gupta, 1984: 15). Joint venture banks play an important role for economic development of nation. They have been adopted new banking technique, management like hypothecation, syndication lending policies, tale banking credit card, master card from international banking technique. They render various services to their customers in order to facilitate their economic and social life. Joint venture banks are operating in Nepal in an act as commercial banks are operating and performing their work under the direction and supervision of Nepal Rastra Bank. Nowadays, there are many joint venture banks and other financial institutions, but there are little opportunities to make fair investment. Meanwhile, the banks and financial institutions are offering competitive deposit and credit interest rate. So to survive in the spirited banking market, one should follow the fundamental principles of sound investment policy with minimum risk and maximum profit. At present, about a dozen of the commercial banks are operating in Nepal and are playing important role in the economic development of the country.

1.1.2 Introduction of Selected Banks

Nepal Investment Bank Limited (NIBL)

Nepal Investment Bank Ltd. (NIBL), previously Nepal Indosuez Bank Ltd., was established in 1986 as a joint venture between Nepalese and French partners. The French partner (holding 50% of the capital of NIBL) was Credit Agricole Indosuez, a subsidiary of one the largest banking group in the world. With the decision of credit Agricole Indosuez to divest, a group of companies comprising of Bankers, Professionals, Industrialists and Businessmen had acquired on April 2002 the 50% shareholding of Credit Agricole Indosuez in Nepal Indosuez Bank Limited. The name of the Bank has been changed to Nepal Investment Bank Limited upon approval of Banks Annual General Meeting (AGM), Nepal Rastra Bank and Company Registrars office with the following shareholding structure. Rashtriya Banijya Bank holding 15% of the Capital. A group of companies holding 50% of the capital

The remaining 20% being held by the General Public (which means that NIBL is a Company listed on the Nepal Stock Exchange). NIBL is committed to building and maintaining a strong relationship between the Bank and the larger community. In order to do so the bank invests in various projects that promote our heritage and the arts, in education & health initiatives, various NGO programs, sports as well as in supporting the less privileged sections of our society. Each year, NIBL sponsors a diverse range of programs that encourage a strong corporate culture of giving in the name of charity and responsibility to our community and nation. NIBL, which is managed by a team of experienced bankers and professionals having proven track record. The bank has 43 branches and 72 ATMs.

Rashtriya Beema Sansthan holding the same percentage.

Himalayan Bank Limited (HBL)

The bank was incorporated in 1992 by a few distinguished business personalities of Nepal in partnership with Employees Provident Fund and Habib Bank Limited, one of the largest commercial Banks of Pakistan. Banking operation was commenced from January 1993. Himalayan Bank is the first commercial bank of Nepal whose maximum shares are held by the Nepalese private sector. Besides commercial banking services, the Bank also offers industrial and merchant banking services. Himalayan Bank has a total network of 41 branches and 73 ATM outlets across the Country. Himalayan Bank is always committed to providing a quality service, with a personal touch, to its valued customers. All customers are regarded as valued clients and treated with utmost courtesy. The Bank, wherever possible, offers tailored facilities to its clients, to meet unique needs and requirements of different clients. To further extend the reliable and efficient services to its valued customers, Himalayan Bank has adopted the latest banking technology and runs the world class banking software Globus on IBM platform. The Bank can now boast of its state-of-the-art IT infrastructure with an identical Disaster Recovery System, offsite. This has not only helped the Bank to constantly improve its service level but has also prepared the Bank for future adaptation to new technology. The Bank already offers unique services such as Himal Remit, SMS Banking, Pre-paid Credit Cards and Internet Banking to customers and will be introducing more services like these in the near future.

Everest Bank Limited (EBL)

Everest Bank Limited (EBL) with slogan Consistent, Strong, Dependable, started its operations in 1994 with a view and objective of extending professionalized and efficient banking services to various segments of the society. EBL joined hands with Punjab National Bank (PNB), India as its joint venture partner in 1997. Punjab National Bank (PNB), our joint venture partner (holding 20% equity in the bank) is the largest nationalized bank in India. With its presence virtually in all the important centers at India and over 6000 ATM counters, Punjab

National Bank offers a wide variety of banking services which include corporate and personal banking, industrial finance, agricultural finance, financing of trade and international banking. For its excellence in banking services, it was awarded the "Best Bank Award 2011"amongst all banks in India by the leading corporate magazine, Business India and also has been conferred with Bank of the Year 2006, Nepal by the Banker, a publication of financial times, London. The bank was bestowed with the NICCI Excellence award by Nepal India chamber of commerce for its spectacular performance under finance sector. The bank is providing its services through a wide network of 52 branches across the nation and over 250 correspondents across the globe. All the major branches of the bank are connected through Anywhere Branch Banking System (ABBS), a facility which enables a customer to do banking transactions from any of the branches irrespective of their having accounts in other branch. The Bank in association with Smart Choice Technology (SCT) is providing ATM services for its customers. EBL Debit Card can be accessed at more than 67 ATMs and over 250 Point of Sales across the nation, 5 extension counter & 20 Revenue Collection across the country making it a very efficient and accessible bank for its customers, anytime, anywhere. The bank is also managing the SCT ATM at Tribhuvan International Airport for the convenience of the customers and the travelers, the first Bank in Nepal to place ATM outlet at the Airport. EBL is playing a pivotal role in facilitating remittance to and from across globe. Being the first Nepalese bank to open a representative office in Delhi, India, the Nepalese in India can open account in Nepal from the designated branches of Punjab National bank and remit their savings economically through banking channels to Nepal. The bank has a Drafts Drawing Arrangement with 175 branches of PNB all over India. With an aim to help Nepalese citizens working abroad, the bank has entered into arrangements with banks and finance companies in different countries

which enable quick remittance of funds by the Nepalese citizens in countries like UAE, Kuwait, Bahrain, Qatar, Saudi Arabia, Malaysia, Singapore and UK. The Bank recognizes the value of offering a complete range of services. We have pioneered in extending various customer friendly products such as Home Loan, Education Loan, EBL Flexi Loan, EBL Property Plus (Future Lease Rentals), Home Equity Loan, Car Loan, Loan Against Shares, Loan Against Life Insurance Policies and Loan for Professionals. EBL have always endeavored in delivering innovative products suiting the consumer's requirements and needs thus enriching, enabling and beautifying their lives.

NABIL Bank Limited (NABIL)

NABIL Bank Limited, the first foreign joint venture bank of Nepal, started operations in July 1984. NABIL was incorporated with the objective of extending international standard modern banking services to various sectors of the society. Pursuing its objective, NABIL provides a full range of commercial banking services through its 51 points of representation across the nation and over 170 reputed correspondent banks across the globe. What is more admirable is with the opening of then Nepal Arab Bank Ltd, Customer Service or marketing took a U-turn. That in substance accelerated the evolution in banking products and services thereafter in Nepal. The bank commenced with a team of about 50 staff members and Rs. 28 million as capital. From the very inception in 1984 as the first joint venture bank to commence operations in Nepal, NABIL has been a leader in terms of bringing the very best international standard banking practices, products and services to the nation. Today the banks mission is to be the Bank of 1st Choice to all stakeholders. For the customers, the Bank craves to be the first choice in meeting all financial requirements, for shareholders the bank wants to be the investment of choice, for Regulators to be an example of a model Bank, and wants to be an outstanding corporate citizen in all the Communities and finally to be the first choice as an employer with whom to build a career.

Today NABIL Bank is a leader in the financial sector in Nepal with a network that has 49 Branches spread across the nation; complimented by a network of 79 ATM outlets and now NABIL Net and NABIL Tele the ease of access of accounts and information for our customers has never been more convenient. NABIL is a full service Bank providing an entire range of products and services, starting with deposit accounts in local and foreign currency, Visa and Master Card denominated in rupees and dollars, Visa Electron debit cards, Personal Lending products for Auto, Home and Personal loans, Trade Finance products, Treasury services and Corporate Financing. NABIL aims to be able to meet entire gamut of financial requirements that is why the banks prides itself in being 'Your Bank at Your Service'.

NABIL, as a pioneer in introducing many innovative products and marketing concepts in the domestic banking sector, represents a milestone in the banking history of Nepal as it started an era of modern banking with customer satisfaction measured as a focal objective while doing business.

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

1.2 Statement of the Problem

Working capital management has been regarded as one of the conditioning factor in the decision-making issues. The management of working capital is synonymous to the management of short-term liquidity. Working capital is regarded as the lifeblood and nerve of a business concern and is essential to accommodate the smooth operations of any organization. Under and over allocation of working of working capital is harmful to an enterprise to achieve its primary objectives. Therefore, maintaining optimal level of working capital

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

The sample banks viz. Nepal Investment Bank Limited (NIBL), Himalayan Bank Limited (HBL), Everest Bank Limited (EBL) and NABIL Bank Limited

(NABIL) seen well in comparison to other Commercial banks on the account of their performance and profitability as well. It is the question of the study that whether there is any relationship of working capital management with regard to their performance and profitability among these banks. So, following are the major problems that have been identified for the purpose of this study. What is the banks image in relation to working capital? of NIBL, HBL, EBL and NABIL?

What are the major factors affecting the management of working capital Which of the current assets are more problematic in NIBL, HBL, EBL What is the lending pattern of loan and advance and other investment? income of NIBL, HBL, EBL and NABIL? and NABIL?

What are the components of working capital, which affect the operating

1.3 Objective of the Study

The main objective of this study is to examine of the management of working capital in commercial banks. The specific objectives of this study are as fallow:

To examine the major factors affecting the management of working capital. To evaluate the working capital financing policy adopted by the banks. To analyze the liquidity maintenance and the efficiency in equity management to generate profit of the banks. To show the relationship of net profit with the working capital, and debt of the banks. To provide appropriate suggestions.

1.4 Significance of the Study

Working capital is regarded as the lifeblood and nerve of a business concern and is essential to accommodate the smooth operations of any organizations. Under and over allocation of working capital is harmful to an enterprise to achieve its primary objectives. Inadequate investment in working capital threatens the solvency of enterprise as well as affects its growth. On the other hand, excessive investment in working capital yields nothing. Nepalese commercial banks are operating in the competitive environment. In this situation, banks have to adopt suitable strategies for their existence. They should balance and coordinate the different functional areas of business concern. The success or failure of any organization depends on its strategy, which is affected by working capital management. Working capital management is the crux of problem to prepare the proper strategy on its favors. So the study might be helpful for the management of the concerned bank as well as it might be valuable for the researcher, scholars, student who wants to study into the working capital management of the Commercial bank.

1.5 Limitations of the Study

None of the study can go beyond the boundary of some limitations and this study is also not an exception. The scope of the present study has been limited in terms of period of study as well as sources and nature of data. The following are the major limitations of the study.

This study is basically based on secondary data. The study is focused on balance sheet and income statement maintained by banks published in annual reports, where the informations were given in condensed form. The period coverage by the study extends over 5 years 2064/065 to 2068/069 because at the time of conducting the present study, the data

could be available up to 2068/069 only. The data of 2069/070 could not be obtained, as the year is running and there has not been audited, thus there may be a chance of failing to the address the recent current

situation. Out of various commercial banks, this study is concerned with the only four commercial banks viz. NIBL, HBL, EBL and NABIL. Although there are various aspects of financial management, this is mainly concerned with the working capital aspects of the sample banks. Mainly financial tools and statistical tools are employed for analyzing the working capital management.

1.6 Chapter Scheme

The entire study has been organized into five main chapters to make the study more Systematic. The followings are the divisions of Chapters.

Chapter 1: Introduction
The first chapter deals with background of the study, a brief review of sample banks, statement of problem, objective of the study, significance of the study and limitations of the study.

Chapter 2: Conceptual Framework & Review of Literature

The second chapter deals with conceptual framework including the fundamental concept of and tools of working capital management. It also includes the brief review of previous research work.

Chapter 3: Research Methodology

The third chapter deals with the research methodology which has been followed to achieve the purposes of the study. It consists of research design, the period covered, nature and sources of data, tools to be used, research variable etc.

Chapter 4: Presentation and Analysis of Data

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

Chapter 5: Summary, Conclusions and Recommendations

The fifth chapter shows the summary of whole study, conclusion drawn and recommendations given. This ends the study paper. Besides these chapters, Bibliography and Appendix are included in this research paper.

CHAPTER - II REVIEW OF LITERATURE

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

2.1.1 Meaning of Working Capital

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

Working Capital refers to the resources of the firm that are used to conduct day-to-day operation that makes business successful. In simple words working capital is the excess of current Assets over current liabilities. Working capital has ordinarily been defined as the excess of current assets over current liabilities. Without cash, bills cannot be paid, without receivable the firm cannot allow timing different between delivering goods to services and collecting the money to pay for them, without inventories the firm cannot engage in production nor can it stock goods to provide immediate deliveries.

As a result of the critical nature of current assets the management of working capital is one of the most important areas in determining whether a firm will be successful. Need of working capital is directly related to firms growth. The term working capital refers to the current assets of the firms those items that can be converted into cash with in the year. Net working capital is defined as the difference between current assets and current liabilities (Hamption and Wagner, 1989: 34).

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

concerned with working capital. Those liabilities which are expected to have been paid within a short period are known as Current Liabilities. The examples of current liabilities are bank overdraft, sundry creditors, bills payables, outstanding expenses, received in advance cash credit etc.

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

2.1.2 Types of Working Capital

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

On the basis of concept

On the basis of time

Gross Working Capital

Net Working Capital

Permanent Working Capital

Temporary Working Capital

2.1.2.1 Gross Working Capital

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

2.1.2.2 Net Working Capital

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

2.1.2.3 Fixed or Permanent Working Capital

The need for current assets arises because of the operating cycle. The operating cycle is a continuous process and, therefore, the need for current assets is felt constantly. But the magnitude of current assets needed is not always the same, it increases and decreases over time. However, there is always a minimum level of current assets which is continuously required by the firm to carry on its business operations. This minimum level of current assets is referred to as permanent, or fixed, working capital. It is permanent in the same way as the firms assets are. Depending upon the changes in production and sales, the need for working capital, over and above permanent working capital will fluctuate.

The volume of investment in current assets changes over a period of time. But always there is minimum level of current assets that must be kept in order to carry on the business. This is the irreducible minimum amount needed for maintaining the operating cycle. It is the investment in current assets which is permanently locked up in the business and therefore known as permanent working capital (Weston, 1996: 333).

2.1.2.4 Variable or Temporary Working Capital

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

2.1.3 Need and Importance of Working Capital

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

current assets, the management of working capital is one of the most important areas in determining whether a firm will be successful.

Following are the main advantages of maintaining adequate amount of working capital in the business:

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

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

III. Easy Loans

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

IV. Cash Discount

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

V.Regular Supply of Raw Materials

In the case of sufficient working capital, it can easily supply raw materials necessary for production and there is no chance of disturbance in production.

The uninterrupted flow of production enables the concern to supply its production in the market regularly.

VI. Morale of Management

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

VII. Smooth Operation of Business

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

VIII. Ability to Face Crisis

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

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

2.1.4 Factors Affecting Working Capital

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

a) Nature and Size of Business

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

b) Manufacturing Process and Length of Production Cycle

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

c) Growth and Expansion of Business

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

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

e) Terms and Conditions of Purchase and Sales

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

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

g) Dividend Policy
The firm having satisfactory level of earning capacity may generate cash profit from operation. The need for working capital can be met with the retained

earnings. A firm which declares dividend and distributes large proportion of cash irrespective of its profit need larger amount of working capital than that which retains larger part of its profits and distributes lower amount of cash dividend.

h) Operating Efficiency of the Firm

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

i) Working Capital Cycle

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

j) Price Level Changes

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

company to company depending on the nature of its operations, its standing in the market and other relevant considerations.

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

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

m) Access to Money Market

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

n) Level of Taxes

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

o) Transport and Communication Facilities

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

p) Attitude Toward Profit

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

q) Attitude Toward Risk

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

1.1.1 1.1.2 2.1.5 Objectives of Working Capital in Banks

A bank undertakes many transactions daily. Sometimes, customers deposit large quantity and sometimes customers withdraw from their deposits in high quantity. Investment fund of bank is covered by deposit collections of different types of account holder. A bank should have to pay the money to depositors when they want to withdraw. For daily operation of office and to meet the administrative expenses, a bank should have certain level of working capital. Working capital is required to run the business smoothly and efficiently in the context of the set objectives. It is no doubt that no company can achieve its goals without proper use of working capital. Therefore, it can compare as lifeblood to the organization. The main objectives of arranging capital are as follows; To pay to depositors, (SLR),

To maintain Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio To satisfy the customers by granting loans promptly and increase the To meet the administrative expenses, perform the task as per objectives To fulfill the present need of business as well as get ready for risk & economic fluctuation in future. of business and run the business smoothly, attraction of business etc.,

1.1.3

2.1.6 Determinants of Working Capital of Banks

Working capital in banks is basically concerned with the liquidity management. Thus, the working capital of banks is synonymous to liquidity of banks. Many factors affect the liquidity or working capital of banks. They are:

a. External Factors

 Prevailing interest rate of bank: If interest rate is high cash demand is Savings & investment situation: If income & saving scale of people is
high, low liquidity. If investment in commercial field is high, high low & liquidity need is low.

Growth & scheming position of the financial market: If financial market

of bank is in growth & prosperity, then low liquidity and if opposite, high liquidity.

liquidity.

b. Internal Factors

Lending policy of bank: Great quantity for long-term investment needs

high liquidity and if short-term loan policy, low liquidity.

Management capacity: If management is efficient & ready to bear risk, Strategic planning & funds flow situation: Liquidity depends upon
planning, & strategy. Current A/C needs high liquidity & payment. On the other hand fixed deposit needs low liquidity. low liquidity.

2.1.7 Demand of Working Capital in Banks

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

Speculative motive

Security motive

2.1.8 Working Capital Policy

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

2.1.8.1 Current Assets Investment Policy

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

a. Relaxed Current Assets Investment Policy

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

b. Restricted Current Assets Investment Policy

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

c. Moderate Policy

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

Figure: 2.1 Alternative Current Assets Investment Policies

2.1.8.2

Current Assets Financing Policy

There are different sources by which current assets are financed. However, each and every source entails certain level of cost and risk. Therefore, a careful study is required before making decision as to the financial sources of current assets. The manner in which the permanent and temporary current assets are financed is called the firms current assets financing policy. A firm can adopt one of the following policies regarding raising funds for current assets.

a. Aggressive Policy
Degree of aggressiveness in financing the current assets depends upon how the current assets have been financed. A firm is generally regarded aggressive if it finances all of its fixed assets and part of the permanent current assets with long term debt plus equity plus spontaneous current liabilities and all of the

temporary current assets with short-term, non-spontaneous liabilities. If part of the fixed assets is also financed with current debt or short term credit, then the firm will be regarded more aggressive.

Figure: 2.2 Aggressive Financing Policy

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

Figure: 2.3 Conservative Financing Policy

c. Maturity Matching Policy

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

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

term financing. It means the firm matches the maturity of financing sources with an assets useful life. It lies between the aggressive and conservative policies.

Figure: 2.4 Maturity Matching Policy

1.1.4

2.1.9 An Overview of Working Capital Management

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

The term working capital management closely relates with short-term financing; it is concerned with collection and allocation of resources. Working capital management relates to problems that arise in attempting to manage the

current assets, the current liabilities and interrelationships that exist between them (Smith, 1974:5).

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

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

Need of working capital is directly related to firms growth. A firm can have different level of current assets to support the same level of output. The level of current assets can be measured by relating current assets to fixed assets. Its proportion upon the fixed assets of the firm indicates the working capital policy of the firm namely conservative and aggressive in two extreme ends. Dividing

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

Figure: 2.5 Alternative Current Assets Policies

A Conservative Policy

Level of current assets

Average Policy

Aggresive Policy

Fixed assets level Output

2.2 Review of Previous Studies

This section deals with views of different scholars in relation to working capital management which lay down conceptual foundation for this study.

2.2.1 Review of Books

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

Pradhan (1988) has published a book on management of working capital in Nepalese PEs. This book is based on the study of nine manufacturing public enterprises of Nepal for the duration of ten years from 1973 to 1982 AD. In his study, he aimed at examining the various aspects of management of working capital in selected manufacturing public enterprises of Nepal. The specific objectives undertaken in his study were: To conduct risk return analysis of liquidity of working capital position.

To estimate the transaction demand functions of working capital and its various components.

To assess the structure and utilization of working capital and

To assess the short term financial liquidity position of the enterprises.

His study has mentioned the following findings. It was found that most of the selected enterprises have been activating a tradeoff between risk and return thereby following neither an aggressive nor a conservative approach. It has showed a poor liquidity position of most of the enterprises. This poor liquidity position has been noticed as the enterprises have either negative cash flows or negative earnings before tax or they have excessive net current debts which cannot be paid within a year. The Nepalese manufacturing public enterprises have on an average half of their total assets in the form of current assets. Of all the different components of current assets, on an average, the share of inventories in total assets is the largest followed by receivables and cash in most of the selected enterprises? The economics of scale have been highest for inventories followed by cash and gross working capital, receivable and net working capital. The regressions results also show that the level of working capital and its components and enterprise desires to hold depend not only on sales but on holding costs also.
Van Horne (2000) another well known expert of financial management and

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

principles of inventory have been examined for inventory management and control.

Shrestha (1995) has published Portfolio Behavior of Commercial Banks in Nepal based on the study of two local commercial banks, three joint-venture banks and one development bank as a sample for the study. Some major findings of her study are hereunder. Total deposits have been the major sources of fund for all the banks. year.

Capital and reserve funds do not seem to have changed much over the

The user of fund analysis shows that the resources of commercial banks are allocated in the liquid funds, investment on securities, loans and Among the portfolio, for Nepalese banks loan and advances share highest volume of the resources and the bills purchased and discounted The excess reserves of the commercial banks show unused resource. The cash reserve exceeds much more than the required cash reserve. the least over the year. advances. Bills purchased and discounted.

1.2 2.2.2 Review of Journals/Articles

Pradhan (1988) has published another article relating to working capital management. He studied on the demand for working capital by Nepalese corporation. He analyzed the selected nine manufacturing public corporation with the 12 years data from 1973-1984. Regression equation has been adopted for the analysis. His study has summarized that the earlier studies concerning about the demand for cash and inventories by business firm did not report unanimous findings. A lot of controversies exist in respect to the presence of economics of scale, roles of capital cost, capacity utilization rates and the speed with which actual cash and inventories adjusted to describe cash and inventories respectively. To pooled regression, result shows the presence of economics of scale with respect to the demand for working capital and its

various components. The regression results suggest strongly that the demand for working capital and its components is function of both sales and their capital cost. The estimated results show that the inclusion of capacity utilization variable in model seems to have contributed to the demand function cash and net working capital only. The effect of capacity utilization on the demand for inventories, receivables and gross working capital is doubtful. Shrestha (July 1982 - June 1983) in his study Working capital management in public enterprises, based on ten selected public enterprises, states that manager often lacks basic knowledge of working capital and its overall impact on the operative efficiency and financial viability of public enterprises. The sample public enterprises are Birgunj Sugar Factory, Janakpur Cigarette Factory, Raghupati Jute Mills, Dairy Development Corporation, National Trading Ltd., Royal Drugs Ltd., National Construction Company of Nepal, Harisiddhi Brick and Tile Factory, Nepal Cheeuri Ghee Industry Ltd., and Chandeswori Textile Ltd. Specially, his study is focused on the liquidity turnover and profitability position of those enterprises. In this analysis, he found that four public enterprises have maintained adequate liquidity position, two public enterprises have excessive and remaining others public enterprises had failed to maintain desirable liquidity position. On the turn over side, two public enterprises had negative turnover, four had adequate turnover, and one had higher turnover on net working capital. He had also found that out of ten public enterprises six were operating in loss while only four were setting some percentage of profit. With the reference of his findings, he has pointed certain policy flaws such as deficient financial planning, negligence of working capital management, deviation between liquidity and turnover of assets and inability to show the positive relationship between turnover and return on net working capital. At the end, he has made some suggestive measures to overcome from the above policy issues. These are identification of management information system, positive attitude towards risk and profit and determination of right combinations of short-term and long-term sources of funds to finance working capital needs.

Mahat (May 26 2004), also has published article relating to spontaneous resources working capital management. He has defined the three major sources of working capital i.e. equity financing, debt financing and spontaneous sources of financing, regarding the working capital management. Debt financing include short-term bank financing such as bank overdraft, cash credit, bills purchase and discounting, letter of credit etc. whereas spontaneous sources of working capital include trade credit, provisions and accrued expenses (Mahat, May 26 2004: Vol. XII, No. 98).

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

Consequently, in a changed economic scenario, every company should realize that inability to manage working capital might land them in a vicious circle that can be hard to get out from. It is indeed essential for industries to tighten their belts and checks their financial stability to face and stand in forthcoming competitive day.

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

2.2.3 Review of Previous Research Works

Dhungana (2013) has carried out research A Study on Working Capital Management of selected Joint Venture Banks in Nepal Main Objectives: To study the position of current Assets and current liabilities of NABIL, NIBL and SCBNL, and their impact on Liquidity.

To analyze the composition of working capital and liquidity utilization To analyze the composition of working capital and assets utilization of To analyze the comparative study of working capital Management among NABIL, NIBL and SCBNL. NABIL, NIBL and SCBNL. of NABIL, NIBL and SCBNL.

 On the basis of the analysis, to provide recommendations and suggestions for the improvement of working capital management of NABIL, NIBL and SCBNL in the future.

Major Findings:

The average major components of the current assets i.e. cash and bank balance, loan and advance are higher in NIBL, money at call or short notice, government securities and miscellaneous assts are higher at

The liquidity position of sample banks are analyzed with the current ratio and quick ratio has highest current ratio and SCBNL has highest Correlation between government securities and total deposit of sample banks are not significant; it shows that there is not close relationship between two variables. But there is highly significant correlation between loan and advance and total deposit of NABIL, NIBL and SCBNL. The banks have better utilization of their loan and advance and total deposit. There is positive correlation between cash and bank and current liabilities and highly significant in NABIL, NIBL and SCBNL. Therefore, the banks have been better utilization of their cash and bank The composition of working capital are cash and bank balance, money at call or short notice, loan and advance, government securities and miscellaneous current assets are significantly different. There is significant difference in composition of working capital among NABIL, NIBL and SCBNL. Since, the mean value of loan and advance on total current assets of sample banks are significantly high and invest their The liquidity position of the sample banks current ratio is not significantly different. But quick ratio is significantly different in liquidity position of NABIL, NIBL and SCBNL. The mean value of fund in income generating sector. balance and current liabilities. quick ratio.

SCBNL.

current ratio of NIBL is higher than NABIL and SCBNL but quick ratio of SCBNL is higher, however, liquidity position of SCBNL is better. Major Recommendations: SCBNL segregates very low portion in the loan and advance, so it is unable to maximize the shareholders value. SCBNL should increase loan and advance portion. The bank should improve its current All the sample banks liquidity position is not good. Their current and quick ratio is lower than normal standards. So they have faced liquidity problem. It is better, as soon as SCBNL, NABIL and NIBL try to By adopting the matching working capital management policy instead of adopting conservative policy these banks can improve their profitability All of three banks need to utilize the outsiders as well as insiders fund As the service of these banks have been limited to urban and semi urban regions of the nation, they should imitate some measures to widen their These banks should also focus on research and development activities in order to retain and keep their position up, as more and more players are entering into the limited market of banking industry of Nepal. reach to the people of rural areas, effectively and efficiently on order to keep all the stakeholders happy. in the short as well as in the long run. maintain the standard by increasing current and quick assets. investment policy about loan and advance.

Acharya (2009) has carried out research Working Capital Management of Manufacturing Companies Listed in NEPSE. Main Objectives: To analyze the current assets and current liabilities policies to examine the factors affecting working capital on profitability.

To provide appropriate suggestions.

To examine factors affecting working capital management.

Major Findings:

It is found out that the companies are accompanied with various hindrances like lower turnover, lower return, lower net working capital or poor liquidity position.

There is lack of proper working capital policy, deteriorating financing situation, lack of appropriate credit and collection policy.

Major Recommendations:

The companies should formulate appropriate working capital policies as per their need, invest idle fund in marketable securities, and adopt definite credit and collection policies.

The researcher suggests the companies to initiate steps towards minimizing administrative and operating expenses, maintain proper relation and interaction among production, marketing and sales It is suggested to develop appropriate information system in determining There should be training, participation in the management conferences, foreign enterprises tour etc. for employees in order to increase their efficiency. exact need of working capital. departments.

Pandey (2010) has done a research on working capital management of hotel industry of Nepal using the financial statements of three sample hotels for five years from 2057/58 to 2061/62 under the heading Working Capital Management in Hotel Industry (With Reference To Hotel Radisson, Hotel Soaltee and Hotel Hyatt). Main Objectives: To analyze the composition of working capital, liquidity position, and profitability position.

To evaluate the relationship between sales and different variables of working capital.

 To examine the working capital cash flow cycle and cash conversion cycle of the said hotels Major Findings: It is found that all three companies have been following aggressive financing policy.

They have negative working capital during the study period; none of the Hotel Hyatt has very poor liquidity position as compared to other hotel turnover of the entire hotels is decreasing due to unstable political Sales revenue is decreasing but operating expenses is in increasing trend Hotel Radisson and Hotel Hyatt have been paying high amount of interest expenses than Hotel Soaltee. Major Recommendations: It is recommended all the hotels to increase the net working capital by reducing short-term loan. accounting for the loss to the hotels. situation for more than a decade. hotels seem to have solid view of the management of working capital.

The researcher suggested introducing effective inventory control techniques, credit policies for collecting receivables.& reduce loan from outside and reduce internal controllable expenses as far as possible in Hotel Hyatt is suggested to reduce loan, advances and deposits and All hotels should also focus on local tourists for generating regular income rather than paying attention to foreign tourists only. increase cash and bank balance. order to confront the liquidity crisis.

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

Main Objectives:

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

two variables. On the other hand, coefficient of correlation between cash and bank balance to current liabilities in case of NIC also shows positive relationship. After considering the probable error there is highly significant relationship between net working capital and net profit in The mean value of current ratio and quick ratio of NABIL are statistically different than NIC. But the cash and bank balance to deposit The mean value of interest earned to total assets ratio is not significantly different, but net profit to total assets and net profit to total deposit are significantly different of NABIL and NIC. ratio are not significantly different. both banks.

Major recommendations:

The large portions of total current assets of both NABIL and NIC banks have cover by loans and advances and it is decreasing in NABIL and increasing in NIC. As, banks should give priority to invest their fund on loan and advances to get higher return, NABIL has not as much of loans and advances proportion on total current assets than NIC. So, NABIL

Total deposits turns over position of studied banks are less than one which is not satisfactory. Fixed deposits and savings deposits turn over position are satisfactory on both NABIL and NIC banks. Though, saving deposits turns over of both NABIL and NIC is satisfactory, NABIL is Although interest earned to total assets ratio is equal on both banks, net profit ratio is higher in NABIL than NIC. It may be due to higher cost on NIC. So, NIC should give an attention of reducing cost of operation so it can have least operation cost, which further maximize its The average current ratio of NIC is higher than that of NABIL. It helps to conclude that the liquidity position of NABIL is worse than that of profitability and maximize shareholders return. not utilizing short term fund of outsiders more effectively than NIC.

should seriously adjust its policy of investment on loans and advances.

NABIL. So NABIL should give attention to increase the current assets Due to the large amount of term debt and low net worth the proportion of outsiders claim in total capitalization is higher in NABIL. NABIL has more risky and aggressive capital structure than NIC. Though both banks use high short term liabilities to cover total capital, NABIL should decrease the long term to increase the degree of protection against long term creditors and to protect total capital against long term debt. Pathak (2012) has done a research work on Working Capital Management of Commercial banks in Nepal a comparative study of EBL and NBBL. Main Objectives: To study the working capital Management of EBL and NBBL. impact. to build ability to meet its current obligation.

To study the position of current assets and current liabilities and their To examine the liquidity and profitability position of EBL and NBBL.

On the basis of the analysis to provide recommendation and suggestion for the improvement of the working capital management of EBL and NBBL. Major Findings: The net working capital of NBBL is negative in some year so the sufficient amount of working capital for operational requirement for There is very high variability of net working capital maintained by In case of EBL fluctuation of the study period, this shows that EBL is The profitability position of NBBL is better than EBL. more efficiency than NBBL. NBBL and EBL. NBBL in case of EBL, the net working capital is positive.

Correlation between investment on government security and total deposit of EBL is highly significant. It shows that there is close

relationship between investment on government securities and total While testing the hypothesis of composition of working capital, it has been observed that the mean value of proportion of cash and bank balance, loan and advance and government securities of NBBL and EBL While testing the hypothesis of liquidity management it has been observed that the mean value of current ratio, quick ratio, and cash and bank balance to deposit ratio of NBBL and EBL are not significantly different. It shows that liquidity management policy of these banks is While testing the hypothesis of profitability position, it is observed that the mean value of net profit to total assets, net profit to total deposit and interest on to total assets of NBBL is not statistically different from that of EBL. Major Recommendations: The loan and advances percentage as a part of current assets of EBL was in the increasing trend. So, it should review, its policy are to reverse the trend, as they are most productive assets. On the other hand the average loan and advances percentage as a part of current assets of NBBL was just more than EBL. So, it should increase the percentage by adopting The standard liquidity ratio should be 2:1, but the low liquidity ratio of both banks suggests that they should enhance their liquidity position by Both of the banks had low average turnover on total deposits which is less than one. Due to low turnover non earning idle funds might be high on these banks. So, these banks should give proper attention on the utilization of idle funds in more productive sector. keeping optimum current assets. new policies. significantly difference. are not statistically different. deposit of EBL. However, it is not significant in case of NBBL.

 Low return on assets of EBL suggests that it should cut down its Both the banks need to utilize the outsiders as well as insiders fund These banks should also focus on research and development activities in order to retain and keep their position up, as more and more players are As the services of these banks have been limited to urban and semi urban areas of the nation they should imitate some measures to widen their reach to the rural areas. entering into the limited market of banking industry in Nepal. effectively and efficiently in order to keep all the stakeholders happy. operating cost in order to maximize its profitability.

2.3 Research Gap

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

CHAPTER - III RESEARCH METHODOLOGY

3.1 Research Design

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

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

3.2 Population and Sample

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

3.3 Sources of Data

This study is conducted on the basis of both primary and secondary data relating to working capital. The secondary data have been extracted mainly through the annual report of NIBL, HBL, EBL & NABIL. Besides these, the annual report of Nepal Rastra Bank has also been equally reviewed. Further, the directives issued by NRB have also been taken as the secondary source of

data. Similarly, various data and information are collected from the periodicals, economic journals, managerial and economic magazine and other published and unpublished reports and documents from various sources. Likewise, the primary data have been collected by distributing questionnaire to the employees and the shareholders of the sample banks.

3.4 Tools Used

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

3.4.1 Financial Tools

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

A) Total Assets Financing

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

B) Total Debt Composition

The total debt of the bank is composed of long term debt and short term debt. The short term debt is easy to obtain in comparison to long term debt. But, short term debt carries higher risk. Thus, higher use of short term debt to financing the working capital means the adoption of aggressive policy.

C) Gross Working Capital

Generally gross working capital means current assets. Thus, higher the current asset indicates higher gross working capital and eventually higher net working capital as well. Under this, the growth rate of gross working capital within the five year period is analyzed.

D) Net Working Capital Growth

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

E) Working Capital Financing Policy

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

F) Working Capital to Total Assets

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

G) Cash Reserve Ratio

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

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

3.4.2 Statistical Tools A) Arithmetic Mean or Average (X)

The major statistical tools used for analyzing the data are as follows;

An average is a single value that represents a group of values. It depicts the characteristic of the whole group. It is a representative of the entire mass of homogeneous data, its value lies somewhere in between the two extremes, i.e. the largest and the smallest items. It is obtained by dividing the sum of the quantities by the number of items. Thus,

Where,

X = sum of the sizes of the items N= number of items

B) Standard Deviation (S.D.)

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

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

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

C) Coefficient of Variation
Karl Pearson developed this measurement to measure the relative dispersion. It is used in such problems where we want to compare the variability of two or more series. It is denoted by C.V. and is obtained by dividing the arithmetic mean to standard deviation. Thus,

D) Coefficient of Correlation
The correlation analysis refers to the techniques used in measuring the closeness of the relationship between the variables. It helps us in determining the degree of relationship between two or more variables. It doesn't tell us anything about cause and effect relationship. It describes not only the magnitude of correlation but also its direction. The coefficient of correlation is a number, which indicates to what extent two things (variables) are related to what extent variations in one go with the variations in the other.

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

E)

Probable Error

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

Where, r = the value of correlation coefficient n = number of pairs of observations

If r < P.E., it is insignificant, i.e. there is no evidence of correlation If r > 6 P.E., it is significant

If P.E. < r < 6 P.E., nothing can be concluded

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

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

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

To find the value of x and y, the following equations should be solved; y xy = = na + bx .. (ii) ax + bx2 (iii)

CHAPTER - IV PRESENTATION AND ANALYSIS OF DATA

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

4.1 Analysis of Secondary Data

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

4.1.1 Total Assets Financing

The total asset of the bank is financed through the outside funding and internal funding. The internal funding involves shareholders equity whereas outside funding involves both long term debt and short term debt. A good combination between these two funding is necessary for the optimal profit achievement. The financing of total assets of the selected banks is presented in the Table: 4.1.

Table: 4.1 Total Assets Financing (Unit in %)

FY NIBL Equity 2007/08 2008/09 2009/010 2010/011 2011/012 Mean S.D. C.V.% 7.61 7.4 8.54 7.52 7.71 7.76 0.45 5.84 Debt 92.39 92.60 91.46 92.48 92.29 92.24 0.45 0.49 HBL Equity 6.40 6.95 7.93 8.05 8.65 7.60 0.90 11.91 Debt 93.60 93.05 92.07 91.95 91.35 92.40 0.90 0.98 EBL Equity 5.61 7.08 5.97 6.67 6.55 6.38 0.58 9.15 Debt 94.39 92.92 94.03 93.33 93.45 93.62 0.58 0.62 NABIL Equity 7.55 6.56 7.14 7.35 7.12 7.14 0.37 5.19 Debt 92.45 93.44 92.86 92.65 92.88 92.86 0.37 0.40

(Source: Appendix I) Figure: 4.1 Total Assets Financing

The above table and figure show the method adopted by the banks to finance the total assets. The table reveals that each bank gives predilection to debt capital than equity capital while financing the total assets. Thus, the total assets

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

assets of the bank. In addition it can be considered that the total assets of HBL and NABIL are much riskier than that of NIBL and NABIL, since the debt capital representation in EBL and NABIL is higher.

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

(Source: Appendix I)

Figure: 4.2 Total Debt Composition

The above table and Figure show the financing policy of the banks through debt. The table depicts that all the banks have extensively used short term debt than long term debt. The use of long term debt does not cross 5% of the total debt capital. Looking each bank, NIBL has not used long term debt in the fiscal year 2007/08 to 2011/12. Thus, long term debt represents 1.84% in lowest to 2.27% in highest. In average the long term covers only 2.01% of the total debt capital however the coefficient of variation is 8.06% indicating high inconsistency. The long term debt financing percentage and short term debt financing percentage, however, in HBL are in fluctuating trend and thus the long term debt financing percentage has ranged from 0.87% in the fiscal year 2011/12 to 1.90% in the fiscal year 2007/08. The short term debt financing percentage has ranged from 98.10% in the fiscal year 2007/08 to 99.13% in the fiscal year 2011/12. In average, the long term debt financing and short term debt financing have represented 1.64 % and 98.36% of the total debt capital. Similarly, the long term debt capital percentage has followed decreasing trend and the short term debt capital percentage has followed increasing trend for the first four fiscal years in EBL. The short term debt capital and long term debt capital have represented 98.43% and 1.57% of the total debt capital in average. Similarly, the mobilization of long term debt in NABIL is quite higher than that

of NIBL and thus has ranged from 1.84% in the fiscal year 2007/08 to 2.27% in the fiscal year 2011/12. It seems that use of long term debt percentage in NABIL has been increasing trend up to year 2009/10. Simultaneously, the short term debt percentage has been in decreasing trend up to year 2009/10. Short term debt has ranged from 96.50% in the fiscal year 2007/08 to 99.12% in the fiscal year 2011/12. In average, the short term debt and long term debt represent 2.93% and 97.07% of the total debt. Also, the variation in long term debt financing percentage is extensively higher than that of short term debt financing. Considering the composition of total debt capital, it can be assumed that the working capital of the banks is much riskier, since uses of higher short term debt demands repayment in every few month, which ultimately desires higher liquidity and thus can cause bankruptcy in case of low current assets. Further, the interest rates on short term debt fluctuate widely than in long term debt.

4.1.3 Gross Working Capital Status

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

Table: 4.3 Gross Working Capital Status (Rs. in Millions)

FY NIBL GWC Growth % 2007/08 23232.53 7.89 32945.08 HBL GWC Growth % 13.92 21262.47 EBL GWC Growth % 34.51 26966.50 NABIL GWC Growth % 22.51

2008/09 24953.98 2009/010 25234.48 2010/011 26445.90 2011/012 24239.53 Mean S.D. C.V.% 24,619.88 1,385.03 5.63

7.40 1.12 4.80 4.58 5.16 2.70 52.33

35449.46 38368.12 41655.25 43882.90 38,460.16 4,447.01 11.56

7.60 8.23 8.57 5.34 8.73 3.16 36.20

26788.84 36489.68 40919.67 42727.95

25.99 36.21 12.14 4.42

36534.72 43206.40 51370.70 55239.67 42,663.60 11,382.31 26.68

35.48 18.26 18.89 7.53 20.53 10.05 48.97

33,637.72 22.65 9,271.55 27.56 13.93 61.50

(Source: Appendix I) Figure: 4.3 Gross Working Capital Status

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

increased from Rs. 32945.08 millions in the fiscal year 2007/08 to Rs. 43882.90 millions in the fiscal year 2011/12. In average the working capital of HBL is Rs. 38,460.16 millions. Also, the growth rate of working capital has ranged from 13.92% in the fiscal year 2007/08 to 5.34% in the fiscal year 2011/12. The average growth rate in gross working capital of bank is 8.73 %, however, the inconsistency in growth rate is higher.

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

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

4.1.4 Net Working Capital Growth

Net working capital means the excess of current assets to current liabilities. Higher the current asset than short term debt demands higher amount of other capital, either long term debt capital or equity capital. The net working capital

of the banks for the five fiscal year periods and the growth has been shown in the table below.

Table: 4.4 Net Working Capital Status (Rs. in millions)

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

(Source: Appendix I)

Figure: 4.4 Net Working Capital Status

The above table and Figure show the net working capital of the banks. It is clear that the net working capital of NIBL is in increasing trend within the five year periods. The net working capital of such bank is lowest, i.e. Rs. 2848.78 millions, in the fiscal year 2007/08 and highest, i.e. Rs. 3482.45 millions, in the fiscal year 2009/10. In average, the net working capital of the bank is Rs. 3126.00 millions, and has grown up by 3.89% in lowest in the fiscal year 2011/12. The highest growth rate is 25.30% in the fiscal year 2008/09. In average the net working capital of the bank has been raised by 15.29%, although the current assets, gross working capital, and current liabilities of the

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

4.1.5 Working Capital Financing Policy

The observed banks used short term debt comparatively much higher than the long term debt to finance the total assets. This indicates that the short term debt financing is also extensively used to finance the working capital. The table

below shows to what extent the short term debt has been used to finance working capital of the bank.

Table: 4.5 Working Capital Financing Policy

Bank Fiscal Year Mean S.D. C.V. %

2007/08

2008/09 2009/010 2010/011 2011/012 NIBL

STD 13593.47 15932.64 16922.11 17216.98 18934.23 WC Ratio 15801.23 17234.19 18232.78 18210.93 19343.39 86.03 92.45 92.81 HBL 94.54 97.88 92.74 4.32 4.66

STD 30776.67 32719.36 35700.44 38777.90 39423.90 WC Ratio 32945.08 35449.46 38368.12 41655.25 42636.35 93.42 92.30 93.05 EBL STD 14696.47 19931.05 24928.10 37919.02 38595.29 WC Ratio 15807.20 21262.47 26788.84 40919.67 42325.59 92.97 93.74 93.05 NABIL STD 24313.77 33095.56 38755.84 47940.56 48234.48 WC Ratio 26966.50 36534.72 43206.40 51370.70 52898.34 90.16 90.59 89.70 93.32 91.18 90.99 1.41 1.55 92.67 91.19 92.72 0.94 1.02 93.09 92.47 92.86 0.47 0.50

(Source: Appendix I)

Figure: 4.5 Working Capital Financing Policy

The above table and Figure depict the working capital financing policy of the banks. The table shows that the banks use extensive amount of short term debt to finance the gross working capital. The financing of working capital in NIBL through short term debt is in fluctuating trend, although it is higher, and thus has ranged from 86.03% in the fiscal year 2007/08 to 97.88% in the fiscal year 2006/07. In average, NIBL has financed 92.74% of the working capital through short term debt and the coefficient of variation in such financing is only 4.66%, indicating consistency in the financing policy. Alike in NIBL, the short term debt financing in working capital has fluctuated in HBL as well. In average, HBL has financed 92.86% of the total working capital through short term debt, and the coefficient of variation in such financing policy is only 0.50%, indicating consistency. The short term debt to

working capital of bank is highest, 93.42%, in the fiscal year 2007/08 and lowest, 92.30%, in the fiscal year 2008/09. Likewise, the short term debt has covered 91.19% of the working capital in lowest in the fiscal year 2011/12, and 92.97% of the working capital in highest in the fiscal year 2007/08 of EBL. In average, EBL has financed 92.72% of the working capital through short term debt. Similarly, the short term debt to working capital of NABIL has been fluctuated during the periods, and thus is maximum, 93.32%, In 2010/11 and is lowest, 89.70%, in the year 2009/10. In average, the short term debt has covered 90.99% of the total working capital of the bank, and the coefficient of variation in the ratio is only 1.55%. The coefficient of variation indicates high uniformity ratio in the policy. Further, the extensive use of short term financing indicates that the banks are risk taker and thus demand higher liquidity. Among the four banks, HBL can be considered as the higher risk taker bank, since the utilization of short term debt capital percentage on working capital is highest.

4.1.6 Working Capital to Total Assets

The working capital to total assets measures the relationship between these two variables. Higher the ratio indicates higher amount of working capital which ultimately requires higher amount of short term debt, which is easier than long term debt to obtain, and bears low interest amount.

Table: 4.6 Working Capital to Total Assets

Bank 2007/08 Fiscal Year 2008/09 2009/010 2010/011 2011/012 NIBL WC TA Ratio Growth 15801.23 17234.19 18232.78 18210.93 19343.39 Mean S.D. C.V. %

16,233.03 17,727.00 18,601.08 18,749.03 19,742.18 97.34 97.22 98.02 97.13 97.98 9.20 32945.08 33519.14 98.29 0.13 4.93 HBL 0.80 5.30 9.20

97.54 0.43

0.439

WC TA Ratio Growth

35449.46 38368.12 41655.25 42343.43 36175.53 39320.32 42717.12 43,234.05 97.99 -0.30 EBL 97.58 -0.42 97.51 -0.07 97.94 1.21 97.86 0.32 0.327

WC TA Ratio Growth

21262.47 21432.57 99.21 0.16

26788.84 36489.68 40919.67 41021.93 27149.35 36916.83 41382.76 41,427.92 98.67 -0.54 98.84 0.17 98.88 0.04 99.02 0.14 98.92 0.20 0.02

NABIL WC TA Ratio Growth 26966.50 27253.39 98.95 0.38 36534.72 43206.40 51370.70 52321.34 37132.76 43867.39 52150.23 52,983.64 98.39 -0.56 98.49 0.11 98.51 0.02 98.75 0.25 98.62 0.23 0.02

(Source: Appendix I)

Figure: 4.6 Working Capital to Total Assets

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

On the basis of working capital to total assets, it can be concluded that NIBL has high liquidity, since the ratio is highest in NIBL, and HBL has low liquidity. However, all the banks differ in paltry in the ratio.

4.1.7 Cash Reserve Ratio

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

Table: 4.7 Cash Reserve Ratio

FY NRB Req. 2007/08 5.00 NIBL CRR 5.02 HBL EBL CRR 2.94 Excess -2.10 NABIL CRR 6.00 Excess 1.00 Excess CRR Excess 0.02 5.92 0.92

2008/09 2009/010 2010/011 2011/012 Mean S.D. C.V.%

5.00 5.00 5.50 5.50

5.43 6.70 6.04 6.34 5.906 0.68 11.51

0.43 1.70 0.54 0.84

5.13 6.76 6.76 6.79 6.27 0.74 11.75

0.13 1.26 1.26 1.29

4.56 14.26 15.53 14.93 10.44 6.15 58.92

-0.44 8.76 10.03 9.43

8.37 9.03 3.02 5.97 6.48 2.37 36.64

3.37 3.53 -2.48 0.47

(Source: Appendix I) Figure: 4.7 Cash Reserve Ratio

The above table & Figure measures the liquidity of the bank to ensure the security of the deposit holders. The table shows that the cash reserve ratio maintained by NIBL is above the minimum standard set out by NRB in all the fiscal years. The CRR of NIBL has followed increasing trend from the year 2007/08 and thus is maximum, 6.34%, in the fiscal year 2011/12 and is minimum, 5.02%, in the fiscal year 2007/08. In average, NIBL has kept 5.906% CRR within the five year periods, and the coefficient of variation in such ratio is 11.51%. Like as NIBL, HBL has also fully implemented the direction of NRB regarding the minimum cash reserve ratio, and thus has exceeded the minimum ratio in each fiscal year. The CRR of HBL is highest, 6.79%, in the fiscal year 2011/12 as well as lowest, 5.13%, in the fiscal year 2008/09, and in average the CRR is 6.27%. In contrast, fiscal year 2007/09 and

2008/09, EBL cannot meet the minimum CRR of NRB and thus represents poor liquidity management. The CRR of EBL in the first fiscal year 2007/08, i.e. 2.94%, is far below the minimum CRR, 5%, and in the fiscal year 2011/12, i.e. 14.93%, is far above the minimum CRR. Whatever, in average the CRR of EBL is 10.44% and the coefficient of variation in the ratio is 58.92%, indicating high inconsistency. However, NABIL has not met the minimum standard of NRB in the fiscal year 2010/11., which may be pernicious to security of deposit holders. The CRR maintained by NABIL has ranged from 3.02% in the fiscal year 2010/11 to 9.03% in the fiscal year 2009/10, and in average the ratio is 6.48%. Comparing four banks, it can be concluded that the NIBL is advanced to other banks in managing liquidity. Next to NIBL, HBL has managed the liquidity better than other banks, while EBL is inferior in managing liquidity. Thus it can be inferred that NIBL is quite success in managing working capital to have sound liquidity position.

4.1.8 Return on Equity

The aggressive policy uses more short term debt, the conservative policy uses less short term debt and the moderate policy uses moderate. Therefore the return on equity is higher in aggressive policy when the equity growth is lower and vice-versa. To determine whether the bank is following aggressive working capital policy, the return on equity and the relationship of ROE with equity growth have been measured. Table: 4.8 Return on Equity
FY NIBL ROE Eq. Gr. 2007/08 2008/09 2009/010 2010/011 13.45 15.34 16.75 19.95 15.25 16.65 19.64 22.96 HBL ROE 22.91 25.30 24.13 14.79 Eq. Gr. 21.53 17.07 24.15 10.24 EBL ROE 24.67 23.49 28.99 30.15 Eq. Gr. 35.62 25.07 14.70 25.21 NABIL ROE 32.76 30.63 32.94 29.70 Eq. Gr. 9.71 18.48 28.44 22.51

2011/012 Mean S.D. C.V.%

13.45 15.79 2.71

15.25

13.34 20.09 5.59 27.83

13.52

29.45 27.35 3.04 11.12

27.56

30.65 31.34 1.44 4.58

39.46

17.17 (Source: Appendix I)

Figure: 4.8 Return on Equity

The above table & Figure present the achievement of the banks in terms of return on equity and the relationship of ROE with the equity growth. The table shows that the return on equity of NIBL has fluctuated during the periods. The ROE is highest, 19.95%, in the fiscal year 2010/11 and lowest, 13.45%, in the fiscal year 2011/12. In average, the bank achieved 15.79% of the equity capital as return. Also, the growth rate of working capital has ranged from 15.25% in the fiscal year 2007/08 to 22.96% in the fiscal year 2010/11. Likewise, the return on equity of HBL for the fiscal year 2007/08 is 22.91%, which has increased to 25.03% in the fiscal year 2008/09, further has decreased to 13.34% in the fiscal year 2011/12. In average, the return on equity is 20.09%, which indicates that HBL has generated Rs. 20.09 from Rs. 100 mobilization of equity capital to finance working capital. Also, the coefficient of variation of

27.83% in the ratio indicates quite uniformity in the ratio. However, the relationship of return on equity on equity capital growth is in inverse order. In other words, the return on equity has increased in the year when the equity capital growth has decreased in the same year compared to that in the previous year. Also, the ROE of EBL has ranged from 24.67% in the fiscal year 2007/08 to 29.45% in the fiscal year 2011/12, and in average the ROE is 27.25%, indicating generation of Rs. 27.35 return from Rs. 100 investment of equity capital. Finally, the growth rate of working capital has ranged from 24.67 % in the fiscal year 2007/08 to 29.45% in the fiscal year 2011/12. Similarly, the ROE of NABIL has been found to be in irregular trend and thus has ranged from 29.70% in the fiscal year 2010/11 to 32.94 in the fiscal year 2009/10. In average, NABIL has generated 31.34% of equity capital as return. In addition, the growth rate on equity capital of the bank has ranged from 9.71% in the fiscal year 2007/08 to 39.46% in the fiscal year 2011/12, and thus has no perfect inverse relationship with ROE. Thus, it can be said that HBL is following perfect aggressive working capital policy, since the principle of working capital states that when the return on equity increases and equity capital decreases, the working capital is said to be aggressive. However, in other bank there is no such strong inverse relationship. Although, it cant be ignored that, the remaining banks are also following aggressive working capital policy.

4.1.9 Statistical Analysis

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

4.1.9.1 Correlation and Regression Analysis

This statistical tool measures the relationship between the variables. The correlation coefficient measures the relationship whereas the regression

analysis measures to what extent the dependent variable is affected by the per unit change in independent variable.

4.1.9.1.1 Net Profit & Net Working Capital

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

Table: 4.9 Correlation & Regression Analysis between Net Profit & Net Working Capital
Correlation between Net Profit & NWC Bank NIBL R r2 P.E. 6 P.E. Remarks NP = 937.065 + 0.372 NWC HBL EBL 0.7405 0.5484 0.1362 0.8174 0.5783 0.3345 0.2008 1.2045 Significant Significant NP = 327.60 + 0.16 NWC NP = 205.94 + 0.15 NWC Regression Equation

0.1301 0.0169 0.2965 1.7793 Significant

NABIL 0.9993 0.9986 0.0004 0.0026 Insignificant NP = -124.93 + 0.32NWC (Source: Appendix II)

The above table shows the relationship between the net working capital and the net profit after tax. The table delineates that the net profit of EBL and HBL has positive relationship with the net working capital. NIBL and NABIL have

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

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

4.1.9.1.2 Net Profit & Short Term Debt

Let the net profit be the dependent variable and short term debt is the independent variable. Then the relationship between them in terms of correlation coefficient and regression line has been presented in the table below. Table: 4.10 Correlation & Regression Analysis between Net Profit & Short Term Debt

Correlation between Net Profit & STD Bank NIBL HBL EBL r r2 P.E. 6 P.E. Remarks

Regression Equation

0.2573 0.0662 0.2875 1.6902 Significant 0.9575 0.9168 0.0251 0.1505 Significant 0.4338 0.1882 0.2449 1.4693 Significant

NP = 733.65 + 0.033 STD NP = 205.02+ 0.02 STD NP = 174.62 + 0.01 STD

NABIL 0.9846 0.9695 0.0092 0.0552 Insignificant NP = -168.60 + 0.03 STD (Source: Appendix II)

The above table measures the relationship between net profit and short term debt. The table depicts that NIBL, HBL & NABIL have perfect positive relationship between net profit & short term debt and in the case of EBL there is negative relationship between net profit & short term debt. of each bank, since the correlation coefficient is higher, i.e. 0.9846 in NABIL, 0.9575 in HBL, and 0.4338 in EBL and lower 0.2573 in NIBL. Further, the coefficient of determination indicates that 6.62%, 91.68%, 18.82% and 96.95% variation in net profit of NIBL, HBL, EBL and NABIL respectively has been caused by variation in short term debt. Also, the P.E. and 6 P.E. calculated are 0.2875 and 1.6902 in NIBL, 0.0251 and 0.1505 in HBL, 0.2449 and 1.4693 in EBL, and 0.0092 and 0.0552 in NABIL respectively.

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

4.1.9.1.3 Net Profit & Long Term Debt

To measure the relationship between net profit and long term debt, the correlation and regression line between them have been determined in appendix, which has been summarized below. Table: 4.11 Correlation & Regression Analysis between Net profit & Long Term Debt
Correlation between Net Profit & LTD Bank NIBL HBL EBL r r
2

Regression Equation

P.E.

6 P.E.

Remarks NP = 869.92 + 0.10 LTD NP = 900.51 + 0.06 LTD

0.8915 0.7948 0.0619 0.3713 Significant 0.1898 0.0366 0.2908 1.7447 Significant

0.2290 0.0524 0.2858 1.7150 Significant NP = 479.92 + 0.15 LTD

NABIL 0.9400 0.8835 0.0351 0.2108 Insignificant NP = -23.83 + 1.16 LTD (Source: Appendix II)

The above table evaluates the relationship between net profit and long term debt. The table reveals that there exist negative relationship between net profit and long term debt in NIBL. From the above table correlation coefficient of NIBL is 0.8915. There is low positive relationship between net profit and long term in NABIL and HBL, since the correlation coefficient between these two variables is 0.1898 in HBL and 0.2290 in EBL, and high positive relationship between these two variables in NABIL, correlation coefficient is 0.9400. However, the coefficient of determination indicates that 79.48%, 3.66%, 5.24%, 88.35% variation in net profit is caused by long term debt NIBL, HBL, EBL and NABIL respectively.

To verify this statement, the probable error and 6 P.E. have been determined. The probable error in the relationship is 0.0619, 0.2908, 0.2858 and 0.0351 and the 6 P.E. is 0.3713, 1.7447, 1.7150 and 0.2108 in NIBL, HBL, EBL and NABIL respectively. The relationship between these two variables is statistically insignificant in NIBL, HBL and EBL, since the value of r is lower than the value of 6 P.E, and statistically significant in NABIL, since the value of r is greater than the value of 6 P.E. Hence net profit may not increase by Rs. 0.10 in NIBL and Rs. 0. 06 in HBL, and certainly increases by Rs.0.15

in EBL and Rs. 1.16 in NABIL with per rupee increment in long term debt, as the regression line specifies, if the respective variable remains stable.

4.1.9.2 Trend Analysis

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

4.1.9.2.1 Trend Analysis of Net Working Capital

Let Year (X) 1, 2, 3, 4 and 5 denotes fiscal year 2007/08, 2008/09, 2009/10, 20010/11 and 2011/12 respectively. Then regression line of net working capital (Y) on year calculated in appendix has been presented below along with the trend value.
Table: 4.12 Trend Analysis of Net Working Capital Fiscal Year 2007/08 2008/09 2009/010 2010/011 2011/012 2012/013 2013/014 Regression Line NIBL 2848.78 2920.88 3482.45 3245.46 3132.44 3783.37 4185.48 Y = 3371.27+ 192.324 X HBL 2168.41 2730.10 2667.68 2877.35 3923.43 4700.31 5220.3 Y =3469.65+ 512.57 X EBL 1331.42 1860.74 2388.47 3000.65 3219.41 3272.89 3552.29 NABIL 2652.73 3439.16 4450.56 3430.14 3678.42 3389.48 3843.17

Y = 2660.84+ Y = 3554.81+ 368.494 X 96.422 X

(Source: Appendix III)

The table shows that the estimated value of net working capital in the fiscal year 2012/13 will be Rs. 3783.39millions for NIBL, Rs. 4700.31millions for HBL, Rs. 3272.89 millions for EBL, and Rs. 3389.48 millions for NABIL and in the fiscal year 2013/14 will be Rs. 4185.48 millions for NIBL, Rs. 5220.30 millions for HBL, Rs 3552.29 millions for EBL and Rs. 3843.17 millions for NABIL. Also, the regression line of net working capital on the time period indicates if the other variable remains constant that the net working capital increases by Rs. 192.324 millions in NIBL, Rs. 512.57 millions in HBL, Rs. 368.494 millions in EBL, and Rs. 96.422 millions in NABIL per year, Thus, it can be concluded that the pace of working capital will be highest in HBL in future as well.
Figure: 4.9 Trend Analysis of Net Working Capital

4.1.9.2.2 Trend Analysis of Short Term Debt

Let the dependent Variable, STD be denoted by Y and the independent variable, Year be denoted by X. Then, the regression equation of STD on Year and the trend value of STD are presented in the below table.

Table: 4.13 Trend Analysis of Short Term Debt Fiscal Year 2007/08 2008/09 2009/010 2010/011 2011/012 2012/013 2013/014 Regression Line NIBL 23639.97 27321.52 31003.07 34684.62 38366.17 42047.72 HBL 30776.7 32719.4 35700.4 37457.90 39131.54 40212.98 EBL 19931.05 24928.10 34101.21 37919.02 40232.43 42043.54 NABIL 24313.77 33095.56 38755.84 40940.56 43152.54 45252.53 47835.63 Y = 39049.49 + 3545.579 X

42989.42 44234.53 45729.27 Y = 34684.62 Y = 36998.334 Y = 34769.983 + 3681.55X + 1966.30 X + 4045.447X

(Source: Appendix III)

The table shows that the short term debt increases with the lapse of time. The estimated value of short term debt in the fiscal year 2012/13 and will be Rs. 42047.72 millions for NIBL, Rs. 40212.98 millions for HBL, Rs. 42043.54 millions for EBL, and Rs. 45252.53 millions for NABIL, and in the fiscal year 2013/14 will be Rs. 45729.27 millions for NIBL, Rs. 42989.42 millions for HBL, Rs. 44234.53 millions for EBL, and Rs. 47835.63 millions for NABIL. Thus, it can be said that, as in past, NABIL will continue to use extensive amount of short term debt to finance the working capital. Also, the regression line of short term debt on year delineates that short term debt increases by Rs. 3681.55 millions in NIBL, Rs. 1966.30 millions in HBL, Rs. 4045.44 millions in EBL, and Rs. 3545.579 millions in NABIL per year, if the variable remains inflexible.

Figure: 4.10 Trend Analysis of Short Term Debt

4.1.9.2.3 Trend Analysis of Net Profit after Tax

The trend value of net profit after tax, and the regression line of NPAT, dependent variable (Y), on the fiscal year, independent variable (X), are presented in the table below.

Table: 4.14 Trend Analysis of Net Profit after Tax

Fiscal Year 2007/08 2008/09 2009/010 2010/011 2011/012 2012/013 2013/014 Regression Line NIBL 658.75 691.66 818.92 1025.11 1085.87 1132.43 1243.53 Y = 950.896 +103.673X (Source: Appendix III) HBL 491.82 635.87 752.83 508.79 545.51 645.33 745.54 Y = 617.955 + 20.455 X EBL 296.4 451.21 638.73 831.76 845.34 886.43 943.53 Y = 699.057 + 107.801X NABIL 673.95 746.46 1031.05 1139.09 1221.21 1398.32 1523.63 Y = 1104.81 + 144.39 X

The above table measures the relationship of net profit with the time period. The table shows that net profit has positive relationship with the time, and thus net profit increases in each year. As a result, the estimated net profit after tax in the fiscal year 2013/14 will be Rs. 1243.53 millions in NIBL, Rs. 745.54 millions in HBL, Rs. 943.53 millions in EBL, and Rs. 1523.63 millions in NABIL, and in the fiscal year 2012/13 will be Rs. 1132.43 millions in NIBL Rs. 645.33 millions in HBL, Rs. 886.43 millions in EBL, and Rs.1398.32 millions in NABIL. Likewise, the regression line of net profit on fiscal year indicates that the net profit of increases by Rs. 103.673 millions in NIBL, Rs. 20.455 millions in HBL, Rs. 107.801 millions in EBL and Rs. 144.39 million in NABIL per year, if the other variable remains uniform. Thus, it can be concluded that the pace of growth in net profit per year is highest in NABIL.

Figure: 4.11 Trend Analysis of Net Profit after Tax

4.2 Primary Data Analysis

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

4.2.1 Classification of Respondents

A total of 24 respondents were surveyed randomly for the questionnaire. Among these, 4 respondents were high level employee, 8 were middle level employee and 12 were shareholders. Likewise, the respondents are classified in terms of their age and sex as given in Table 4.15.

Table: 4.15 Classification of Respondents S.N. Basis of Classification Occupation High Level Employee 1 Middle Level Employee Shareholder Total Age Below 25 2 25 to 40 40 above Total Sex 3 Male Female Total (Source: Field Survey, 2013) 9 15 24 37 63 100 2 6 7 15 2 6 1 9 4 12 8 24 17 50 33 100 3 5 7 15 1 3 5 9 4 8 12 24 17 33 50 100 Male Female Number Percentage

4.2.2 Performance Role of working Capital

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

Table: 4.16 Role of Working Capital No. of Respondents Responses High Level Employee Middle Level Employee Shareholder Total No. %

Highly Important Important Not so Important Total

16

67

0 0

2 2

4 0

6 2

25 8

12

24

100

(Source: Field Survey, 2013)

The table manifests the responses of the surveyed respondents regarding the magnificent of the performance role of the working capital for sound financial management. The table emblazons that the entire high level employee considered as working capital role to be highly important for the financial management of the banks. However, only 4 out of 8 middle level employees have considered as highly important, and only 8 out of 12 shareholders have considered being most crucial for financial management. Likewise, 2 out of 8 middle level employees and 4 out of 12 shareholders have considered the role of working capital as only important for efficient financial management of the banks. In contrast, 2 out of 8 middle level employees have considered role of working capital weighs not so important role for the success of financial management of banks.

In overall, the majority of the respondents, 16 out of 24, indicating 67% of the total respondents, have considered the performance role of working capital is highly important for smooth running of business. Likewise, only 25% (6 out of 24) and 8% (2 out of 24) of the respondents give the response that the performance role of working capital is important and not so important for business respectively. Thus, considering the overall majority and the majority of each category of the respondents, it can be assumed that the role of working capital is highly significant in financial management of the bank.
Figure: 4.12 Role of Working Capital

4.2.3 Responsibility to Manage Working Capital

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

Table: 4.17 Responsibility to Manage Working Capital

No. of Respondents Responses High Level Employee Top Level Management Middle Level 0 2 2 4 17 4 Middle Level Employee 6 10 20 83 Shareholder Total No. %

Management Lower Level Management Total 4 8 12 12 100 0 0 0 0 0

(Source: Field Survey, 2013) The table delineates that the entire high level employees have agreed that the top level management is obliged for the effective management of working capital. To substantiate this fact, 6 out of 8 middle level employees and 10 out of 12 shareholders have also stated that the top level management is most responsible for the management of working capital. In contrast to the above statement, just 2 out of 8 middle level employees and 2 out of 12 shareholders have claimed that the middle level management should be much onus for the effective management of the working capital.

In overall, the majority of the total respondents, 20 out 14 (83%) have stated that high level management is responsible for managing working capital. Likewise, 17% respondents stated that middle level management should be responsible to manage working capital whereas nobody pointed out Lower Level Management to be responsible for working capital. Paraphrasing the analysis, it can be considered, on the basis of the overall majority and the majority of each category, the top level management should be most responsible for the effective management of working capital. Figure: 4.13 Responsibility to Manage Working Capital

4.2.4 Working Capital Policy

There are three types of working capital viz. aggressive, moderate and conservative. The policy depends upon the nature of the business. So, to know which type of working capital befits in bank, the respondents were asked on this regard. The responses obtained from them are presented in the table: 4.18. Table: 4.18 Working Capital Policy
No. of Respondents Responses High Level Employee Aggressive Moderate Conservative Total 4 0 0 4 Middle Level Employee 8 0 0 8 6 4 2 12 18 4 2 24 75 17 8 100 Shareholder No. Total %

(Source: Field Survey, 2013)

The table depicts that entire high level employees are in the opinion that the bank should following aggressive working capital policy, which means that the banks should finance its fund mostly through the debt capital, especially using the short term debt. Also, the entire middle level employees have supported this opinion. However, only 6 out of 12 surveyed shareholders have buttressed this view. In contrast, 4 out of 12 shareholders have opined that the bank should

adopt moderate working capital policy, which indicates that the bank should use the equity capital and debt capital in equal proportion to meet the fund requirement. Finally, 2 out of 12 shareholders has stated that the bank should adopt conservative working capital policy, indicating the equity capital should be higher than the debt capital to reduce the risk that can arise from outside financing.

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

Figure: 4.14 Working Capital Policy

4.2.5 Impact of Working Capital on Profitability

To know the degree of impact of working capital on profitability, the respondents were asked whether working capital affects on profitability or not. The responses obtained are presented in the following table. Table: 4.19 Impact of Working Capital on Profitability
No. of Respondents Responses High Level Employee Yes No Dont Know Total 4 0 0 4 Middle Level Employee 6 0 2 8 6 2 4 12 16 2 6 24 67 8 25 100 Shareholder Total No. %

(Source: Field Survey, 2013) The table shows that the entire high level employees, 6 out of 8 middle level employees and 6 out of 12 shareholders are in the view that certainly the working capital has affect on the profitability of the bank in some extent. In contrast to this view, 2 out of 12 shareholders has opined that the working capital policy has no relationship with the profitability of the bank, while 2 out of 8 middle level employees and 4 out of 12 investors have opined have been bewildered with this question and said that they have no idea on this issue.

In overall, two-third (67%) of the respondents stated that certainly working capital policy highly impacts the level of profit earning. However, 8% of the respondents said that working capital does not affect profitability, whereas 25% of the respondents remained neutral. Analyzing the majority of the respondents, and the majority of each category, it can be categorically said that working capital policy of the bank has high impact on its profitability.

Figure: 4.15 Impact of Working Capital on Profitability

4.2.6 Working Capital and Risk

Also to know whether working capital has impact on risk of the company or not, the respondents were asked on this matter. The responses obtained are presented in the following table: 4.20.
Table: 4.20 Working Capital and Risk

No. of Respondents Responses High Level Employee Yes No Dont Know Total 4 0 0 4 Middle Level Employee 4 2 2 8 8 2 2 12 16 4 4 24 Shareholder

Total No. %

67 17 16 100

(Source: Field Survey, 2013) It has been observed that the entire high level employee (4 out of 4), half of the middle level employees (4 out of 8) and two-third of the shareholders (8 out of 12) contemplates that working capital policy affects on the risk of the company. In contrast, 2 out of 8 middle level employees and 2 out of 12 shareholders are in the view that the working capital has nothing to do with the risks that is confronted by the banks. In addition, it has been ascertained that 2 out of 8 middle level employees and 2 out of 12 shareholders have no idea on this issue.

In total, most of the respondents have agreed that working capital has impact on risk of the company. About two-third of the respondents (67%), 16 out of 24, stated that working capital policy affects the risk of the company, approximately 17% of the respondents and 16% of the respondents said that working capital policy does not have impact on risk of the company and remained neutral respectively. Thus, on the basis of the overall majority and the majority of each category of respondents, it can be concluded that working capital policy certainly affects the risks of the banks. Figure: 4.16 Working Capital and Risk

4.2.7 Liquidity Position

Since the liquidity ratios plays a crucial role in paying debts and preventing company from turning bankruptcy, the respondents were asked whether the liquidity position of the bank is appropriate. The responses obtained are presented in the following table 4.21. Table: 4.21 Liquidity Position
No. of Respondents Responses High Level Employee Yes No Dont Know Total 2 2 0 4 Middle Level Employee 2 6 0 8 4 6 2 12 8 14 2 24 34 58 8 100 Shareholder Total No. %

(Source: Field Survey, 2013)

The table shows that only 2 out of 4 high level management, 2 out of 8 middle level management, and 4 out of 12 shareholders are in the view that the banks are maintaining satisfactory level of liquidity. In contrast, 2 high level employees, 6 middle level employees and 6 shareholders are in the opinion that the banks are not maintaining adequate liquidity to meet the obligations and thus it might jeopardize the credibility owned by the bank to depositors,

investors and other related bodies. However, 2 shareholders have said nothing on this issue.

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

Figure: 4.17 Liquidity Position

4.2.8 Working Capital Investment Policy

To know which working capital investment policy the most of the commercial bank is adopting, the respondents were asked to express their view on this regard. The responses obtained from them have been presented in the following Table 4.22. Table: 4.22 Working Capital Investment Policy

No. of Respondents Responses High Level Employee Relaxed Moderate Restricted Total 4 0 0 4 Middle Level Employee 6 2 0 8 10 2 0 12 20 4 0 24 Shareholder

Total No. %

67 17 16 100

(Source: Field Survey, 2013)

The table manifests that the entire high level employees, 6 middle level employees and 10 shareholders are in the view that the banks are adopting relaxed working capital investment policy; whereas 2 middle level employees and 2 shareholders have assumed that the banks are adopting moderate working capital investment policy. In overall, it has been ascertained that most of the commercial banks are adopting relaxed working capital investment policy. About 83% of the respondents, 17% of the respondents and 0% of the respondents said that the company is adopting relaxed, moderate and restricted working capital investment policy respectively. Looking the majority, 20 out of 24 and the financial statement, where current assets is higher than fixed assets in each year, it can be considered that the company is adopting relaxed working capital investment policy.

Figure: 4.18 Working Capital Investment Policy

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

Table: 4.23 Most Influential Factor of Working Capital

Influencer Nature and Basis 1 Total 12 2 10 Rank 3 2 4 0 5 0 6 0 24 87 Total Weight Mean Weight 1.53 Overall Rank 1

Size of Business

High Level Employee Middle Level Employee Shareholder Total

2 6 4 0 0 0 0 2 0 0 2 0 0 0 0 10 2 2 6 0 0 0 0

2 2 6 0 0 0 0 2 0 0 2 4 0 2 2 8 2 4 2 0 0 0 0

0 0 2 2 0 2 0 14 2 4 8 4 2 2 0 2 0 0 2 0 0 0 0

0 0 0 0 0 0 0 6 2 4 0 16 2 4 10 2 0 0 2 0 0 0 0

0 0 0 14 2 4 8 0 0 0 0 0 0 0 0 2 0 2 0 8 2 2 4

0 0 0 8 2 2 4 0 0 0 0 0 0 0 0 0 0 0 0 16 2 6 8

4 8 12 24 4 8 12 24 4 8 12 24 4 8 12 24 4 8 12 24 4 8 12

3 5 11 93 11 19 32 268 7 14 15 237 7 13 22 171 3 10 12 194 11 23 34

1.5 1.25 1.83 5.19 5.5 4.75 5.33 3.17 3.5 3.5 2.5 3.47 3.5 3.25 3.67 2 1.5 2.5 2 5.64 5.5 5.75 5.67

1 1 1 5 3 5 5 3 2 4 3 4 2 3 4 2 1 2 2 6 3 6 6

Current Assets Policy

High Level Employee Middle Level Employee Shareholder Total High Level Employee

Credit Policy

Middle Level Employee Shareholder Total

Growth and Expansion

High Level Employee Middle Level Employee Shareholder Total High Level Employee

Profit Margin

Middle Level Employee Shareholder Total High Level Employee

Level of Taxes

Middle Level Employee Shareholder

(Source: Field Survey, 2013) The rank analysis has substantiated that the nature and size of the business is the most influential factor for designing working capital policy. Precisely, 2 high level employees, 6 middle level employees, and 4 shareholders have ranked 1 for the nature and size of business. Similarly, the rank analysis depicts that the profit margin of the bank has been ranked 2 for the determinant of the working capital. Likewise, credit policy of the bank has been ranked 3, growth and expansion of the bank has been ranked 4, current assets policy of the bank has been ranked 5 and level of taxes has been ranked 6 as the most influencing factor of the working capital policy of the bank.

4.3 Major Findings of the Study

From the above data analysis, the following major findings have been drawn;

Findings from Secondary Data Analysis

 Operating efficiency of bank, Dividend policy, working capital cycle, change in price level, nature and size of business, attitude towards risk and profit, level of taxes, NRB directives, economic policy of government etc are the major components affecting working capital management of Most of the banks finance total assets by using extensively debt capital than equity capital. In average, debt capital represents 92.24 %, 92.4 %, 93.62 % and 92.86 % of the total assets finance in NIBL, HBL, EBL and NABIL respectively. However, only 7.76%, 7.60%, 6.38% and 7.14 % of the total assets finance is represented by equity capital in NIBL, HBL, Long term debt has been used in paltry amount compared to short term debt. Short term debt represents 97.99 % in NIBL, 98.36% in HBL, The gross working capital of banks has followed increasing trend. During the five year periods, the average gross working capital is Rs. 24,619.88 millions in NIBL, Rs. 38460.16 millions in HBL, Rs. 33637.72 millions in EBL, and Rs. 42663.60 million in NABIL. And the average growth rate in gross working capital is 5.16%, 8.73%, 22.65% and 20.53% in NIBL, Each bank has extensively used short term debt to finance working capital, current assets. 92.74%, 92.86%, 92.72% and 90.99%, of the total working capital of NIBL, HBL, EBL and NABIL respectively has been The working capital has represented 97.54% in NIBL, 97.86% in HBL, The liquidity position of the bank is not so satisfactory; the bank is also adopting relaxed working capital investment policy. During the study period only NIBL and HBL have met the minimum cash reserve ratio directed by NRB with in whole years. EBL maintains 14.26 %, 15.53% and 14.93 % CRR in the year 2009/10, 2010/11 and 2011/12. It is much 98.92% in EBL and 98.62% in NABIL, of the total assets. financed through short term debt. EBL, HBL & NABIL respectively. 98.43% in EBL and 97.07% in NABIL of total debt capital. EBL and NABIL respectively. banks.

greater than the directives of NRB. The average CRR maintained during the five year periods is 5.906% by NIBL, 6.27% by HBL, 10.44% by EBL The relationship of return on equity and equity growth is in complete reverse order only in HBL first 3 years, which also indicates the adoption of perfect aggressive working capital policy by the bank. NIBL, HBL, EBL and NABIL have generated Rs. 15.79, Rs. 20.09, Rs. 27.35 and The net profit has positive relationship with net working capital and short term debt. On the other hand net profit has positive relationship with long term debt however it is negative with respect NABIL. The relationship between net profit & long term debt is statistically insignificant in The estimated value of net working capital in the fiscal year 2013/14 will be Rs. 4185.48 millions for NIBL, Rs. 5220.30 millions for HBL, Rs. The short term debt in 2013/14 will be Rs. 45729.27, Rs. 42989.42, Rs. 44234.53 and Rs. 47835.63 for NIBL, HBL, EBL and NABIL The net profit in the fiscal year 2013/14 will be Rs. 1243.53 millions for NIBL, Rs. 745.54 millions for HBL, Rs. 943.53 millions for EBL and Rs. 1523.63 millions for NABIL respectively. 3552.59 millions for EBL and Rs. 3843.17 millions for NABIL. NABIL. Rs.31.34 respectively from Rs. 100 investment of equity capital. and 6.48% by NABIL.

Findings from Primary Data Analysis

capital is very important in the banks.

The primary data analysis shows that the performance role of working

Top level management should be responsible for managing working Aggressive working capital policy is appropriate in the commercial banks. capital.

Working capital is highly significant in financial management of the bank.

 Working capital has greater impact on the profitability and risk of the Working capital policy certainly affects the risks of the banks. adopting relaxed working capital investment policy. bank.

The liquidity position of the bank is not so satisfactory; the bank is also Eventually, the nature and size of the business is the most influential factor in the working capital management of the banks.

CHAPTER -V
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Summary
The primary goal of the developing country like Nepal is to develop economy rapidly and to promote the welfare of the people and nation. So, very recently, Nepal has adopted the path of economic liberalization for the sake of the

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

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

The main objective of the study is to study the working capital management of banks, especially in Nepal Investment Bank Limited, Himalayan Bank Limited, Everest Bank Limited and NABIL Bank Limited. To fulfill this objective of

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

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

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

5.2 Conclusions
Working capital is regarded as the lifeblood and nerve of a business concern and is essential to accommodate the smooth operations of any organization. Under and over allocation of working of working capital is harmful to an enterprise to achieve its primary objectives. Therefore, maintaining optimal level of working capital is the crux of the problem as it is strongly related to the

tradeoff between risk and return. The following major conclusions have been drawn: It is difficult to point out as to how much working capital need by a particular business organization. An organization, which is not willing The debt capital has been the main source of funds for banks than equity capital while financing the total assets. Among the four selected banks, the preponderance of debt capital is highest in EBL and NABIL, which ultimately has visualized higher risk in total assets in these banks in It has been ascertained that the short term debt has been used abound than long term debt in meeting the funds requirement. HBL has been found in advanced position in mobilizing highest portion of short term debt, which consequently indicates that the working capital of HBL is most risky. However, all the banks are following aggressive working Further, the banks have paid more concern in raising the gross working capital for having befit liquidity. Likewise, the banks have increased the current assets in greater extent to current liabilities; as a result it can be It can be inferred that the observed banks are risk takers since the short term financing to working capital is higher in each banks. In addition, HBL can be considered as the highest risk taker, since the utilization of On the basis of highest ratio, it can be assumed that EBL has highest liquidity. This axiom has also been categorically buttressed by the cash reserve ratio, as the cash reserve ratio is highest in EBL. However, it is quite disappointing that except NIBL and HBL, the other two observed banks have not met the minimum cash reserve ratio as directed by NRB. Thus, it cannot be ensured that that the deposits are asylum in the banks. short term debt capital percentage on working capital is highest. asserted that the net working capital has been augmented. capital policy. comparison to other banks. to take more financial risks, can go for more short-term liquidity.

 Observing the relationship of return on equity and equity capital growth, it can be considered that only HBL is following the perfect aggressive It can be assumed that the relationship between net profit and net working capital is significant, and thus net profit increases/decreases with the increase/decrease in net working capital. Also, the same situation exists between the net profit and short term debt. However, the relationship between net profit and long term debt is positive and The responsibility of top level management should be more liable than lower echelon management in managing the required working capital. Further, the bank should be risk taker and should adopt the aggressive policy for the sustainability of the bank in long run, since the working On the basis of questionnaire survey, it can be concluded that the role of working capital is crucial for smooth operation of the bank. And astoundingly, it can be concluded that the liquidity position of the banks are not satisfactory, and the banks should review the liquidity management to ameliorate the liquidity. capital has crucial impact on the profitability and risk. significant in NIBL, HBL and EBL. working capital policy.

5.3 Recommendations
On the basis of major findings and the conclusion drawn, the following recommendations, which will undoubtedly enhance the banks performance, are made; Positive working capital represents the sound financial management of the banks. Similarly, the negative working capital represents the poor financial management. In case of concerned Banks, positive working capital is found during the study period. This bank should be maintained The banks should follow moderate policy, to minimize the risk. They should use equity capital as well in the same level of debt capital. optimum size of current assets and liabilities.

 The banks should use the long term debt capital instead of large amount of The banks should follow the cash reserve ratio directed by NRB to The observed banks should promote fixed deposit to lessen the immediate Considering the cash and bank balance, the bank should increase the Similarly, the observed banks should effectively mobilize their total assets, shareholders equity and total deposit to maximize its profit and sustain in long run. Also, these bank needs to reduce its cost of services to The bank needs to adopt the best capital structure that will best suit its Finally, the banks need to have highly positive relationship between loan and advances with total deposit and loan and advances with net profit. interest and thus maximizes profitability and liquidity and minimizes cost. maximize their profit. portion of cash and bank balance in total assets. requirement of cash and thus having sound working capital management. minimize the liquidity risk. short term debt capital to reduce the risk.