CHAPTER - I

INTRODUCTION

1. 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

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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

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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 bank’s 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

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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.

1.1.1 History 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

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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 Ceylon

Limited on 2052 B.S. have been established. Till now other commercial banks have been

also established.

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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

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.

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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

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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.

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

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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 firm’s 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.

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The sample joint ventures banks viz. NABIL Bank Limited (NABIL), Nepal SBI Bank

Limited (NSBI), Everest Bank Limited (EBL), Standard Chartered Bank Limited (SCBL)

Himalayan Bank Limited (HBL) and Nepal Bangladesh Bank Limited (NBB) 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 bank’s image in relation to working capital?

 What are the major factors affecting the management of working capital of

EBL, ?

 What is the lending pattern of loan and advance in relation to deposit?

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

of , EBL,?

1.3 Objective of the Study

The main objective of this study is to examine of the management of working Capital and

profitability of commercial banks in Nepal with reference to six joint ventures bank. The

major objectives of this study are as follows:

 To study and analyze the relationship between the Working Capital Management
and profitability of commercial banks in Nepal.

 To study and analyze the effects of different components of working capital

management on profitability.

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  To make recommendation and suggestion to the concerned banks about the
effects of working capital management on its profitability.

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.

According to the subject area in the research, an attempt has been made to address and

make experiment to do a research to fill up a knowledge and exposure in banking

industry, which will be supportive for ongoing and future consideration and utilization on

the decision – making under liquidity/leverage conditions in financial management in

Nepal. In this financial discipline, research studies, forum discussions, researches and

term papers on various kinds on working capital management and profitability are in the

process. Also most of the financial management specialists were also emphasis the

importance of sharing information on the discipline for working capital management,

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determinants of WCM and the Impact of WCM into firm’s profitability in their books,

articles and websites etc. This research reveals that:

 This study will attempt to emphasis on the importance of working capital related

to the entire operations of any organization especially in Nepalese banking

industry for the purpose of revealing the effectiveness of the progress of finance

performance.

 There is a growing trend in Nepal in the field of banking, so that they would have

understood and practiced to evaluate the importance of working capital for the

purpose of interpreting the financial performance of the firm so that the financial

capabilities of the business or the people who are engaging operating decision

making. This is almost important to evaluate the effective utilization of funds to

keep the optimal level of leverage as well as profitability of the firm.

 This research would be beneficial to know understand and evaluate the

interrelationship between the working capital management and profitability, so

that the banking firms may have a stance on maintaining significant level of liquid

assets in order to maintain optimal cash position to be withdrawn on the demand

of the customers so that they are making decisions which facilitates to a

sustainable profitability though their effective fulfillment of customer

requirements and industry financing.

 The banking institutions are the most liquid and financially channeling throughout

the economy of the country, so that banking and insurance companies cater

intermediate facilitation to other sectored companies in fulfilling their financial

requirements and investment needs for the smooth functioning of the business

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 operations. Therefore, the working capital management of these companies

should be ideally positioned and least cost adapted to perform better financial

performance in order to achieve the objectives.

According to the above experience, this research will be treated cohesive path in decision

making for effective managing in finance for the purpose of implementing the operations

and it can be justified as “it is important that to be aware of the fact that working capital

is not only about considered at the stage of maintaining day to day operating cycle but

also it is the key role to the successful functioning to the future stability of both

financial / operational stand of any organization. Therefore, this research will be idle for

the purpose as above into the business world according to the findings and data collected

and the knowledge gathered from books, articles & term papers, which I read for the

purpose of supporting to do successful and productive study.

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 information’s were given in condensed form. The period coverage by

the study extends over 5years 2015/16 to 2019/20 because at the time of

conducting the present study, the data could be available up to 2015/16 only. The

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 data of 2019/20could not be obtained, as the annual report for this period has 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 six joint

venture banks viz. NABIL, NSBI, EBL, SCBL, HBL and NBB

 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 Organization of the Study

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.

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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.

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 CHAPTER - II

REVIEW OF LITERATURE

2.1 Conceptual Framework

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.

2.1.1 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 firm’s capital which is block on

a permanent or fixed basis. Such assets are not purchased with the objective of resale.

To operate business, a firm also needs another type of capital which is known as Short

Term Capital or Working Capital. The funds required for purchased of raw material,

payment of wages 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,

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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 firm’s those items that can be converted into cash with in the year.

Net working capital is defined as the difference between current assets 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 firm’s capital which is block on a

permanent or fixed basis. Such assets are not purchased with the objective of resale.

To operate business, a firm also needs another type of capital which is known as Short

Term Capital or Working Capital. The funds required for purchased of raw material,

payment of wages 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.

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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).

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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;

Figure 2.1: Types of Working Capital

[Link] 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 working capital.

 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” (Kulkarni, 1990: 374).

 Gross Working Capital = Total Current Assets

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[Link] 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

[Link] 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 firm’s 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).

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[Link] 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.

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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.

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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

employee’s 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

23
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

24
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

25
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

26
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.

27
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.

28
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.

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

f 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,

 To maintain Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio (SLR),

 To satisfy the customers by granting loans promptly and increase the attraction of

business etc.,

 To meet the administrative expenses, perform the task as per objectives of

business and run the business smoothly,

 To fulfill the present need of business as well as get ready for risk & economic

fluctuation in future.

29
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 low &

liquidity need is low.

 Savings & investment situation: If income & saving scale of people is high, low

liquidity. If investment in commercial field is high, high liquidity.

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

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

liquidity.

 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.

30
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

 Security motive

 Speculative motive

2.1.8 Working Capital Policy

“Working capital policy refers to the firm’s 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.

[Link] 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

31
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 2.2: Alternative Current Assets Investment Policies

32
[Link] 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 firm’s 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 2.3: Aggressive Financing Policy

33
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 2.4: Conservative Financing Policy

34
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

35
sources with an asset’s useful life. It lies between the aggressive and conservative

policies.

Figure 2.5: Maturity Matching Policy

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

36
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 firm’s

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

37
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.

38
Figure 2.6: Alternative Current Assets Policies

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

39
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 assess the short term financial liquidity position of the enterprises.

 To assess the structure and utilization of working capital and

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

components.

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

40
 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.

41
  Total deposits have been the major sources of fund for all the banks.

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

 The user of fund analysis shows that the resources of commercial banks are

allocated in the liquid funds, investment on securities, loans and advances. Bills

purchased and discounted.

 Among the portfolio, for Nepalese banks loan and advances share highest volume

of the resources and the bills purchased and discounted the least over the year.

 The excess reserves of the commercial banks show unused resource. The cash

reserve exceeds much more than the required cash reserve.

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

42
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

43
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

44
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

Working capital management is a more popular study of research in a manner of different

views in different environments. It is elucidated that efficient liquidity management

involves planning and controlling working capital that reduces the risk of inability to

meet due short-term obligations and avoids excessive investment in these assets (Eljelly,

45
2004). According to a study The relation between profitability and liquidity was

examined, as measured by current ratio and cash gap (cash conversion cycle) on a sample

of joint stock companies in Saudi Arabia using correlation and regression analysis. The

study found that the cash conversion cycle was of more importance as a measure of

liquidity than the current ratio that affects profitability (Raheman & Nasr, 2007). The size

variable was found to have significant effect on profitability at the industry level. The

results were stable and had important implications for liquidity management in various

Saudi companies. First, it was clear that there was a negative relationship between

profitability and liquidity indicators such as current ratio and cash gap in the Saudi

sample examined. Second, the study also revealed that there was great variation among

industries with respect to the significant measure of liquidity.

The most firms had a large amount of cash invested in working capital (Deloof, 2003). It

can therefore be expected that the way of managing working capital will have a

significant impact on profitability. Deloof (2003) found that there is a significant negative

relationship between gross operating income and the number of days accounts receivable,

inventories and accounts payable of Belgian firms. Also he suggested that the value could

be created by the managers for their shareholders by reducing the number of days’

accounts receivable and inventories within a reasonable minimum (Raheman & Nasr,

2007). The negative relationship between accounts payable and profitability is consistent

with the view that less profitable firms wait longer to pay their bills.

The profitability and liquidity comprised the significant objective in working capital

management as emphasized by Smith and Begemann 1997. The problem arose because

the maximization of the firm's returns could seriously threaten its liquidity, and the

46
pursuit of liquidity had a tendency to dilute returns. (Raheman & Nasr, 2007). This article

evaluated the association between traditional and alternative working capital measures

and return on investment (ROI), specifically in industrial firms listed on the

Johannesburg Stock Exchange (JSE). The problem under investigation was to establish

whether the more recently developed alternative working capital concepts showed

improved association with return on investment to that of traditional working capital

ratios or not. Results indicated that there were no significant differences amongst the

years with respect to the independent variables. The results of their stepwise regression

corroborated that total current liabilities divided by funds flow accounted for most of the

variability in Return on Investment (ROI). The statistical test results showed that a

traditional working capital leverage ratio, current liabilities divided by funds flow,

displayed the greatest associations with return on investment. Well-known liquidity

concepts such as the current and quick ratios registered insignificant associations whilst

only one of the newer working capital concepts, the comprehensive liquidity index,

indicated significant associations with return on investment.

Other several research studies were concluded the importance of working capital

management of enterprises in a manner of different views in different environments. The

table 1 shows as follows.

47
Table 2.1: List of Previous Research Works

S. No. Researcher and year Basis of industry Relationship between

wcm & profitability
01. Amit, sur and rakshit (2005) Indian pharmaceutical No definite relationship
industries
02. Narware (2004 Fertilizer company Both negative and
positive
03. Mukhopadhyay (2004) Loans and advances, and
other current assets
hardly had only role to
contribute in sales
04. S.c. bardia (2004) Positive relationship
05. Ghosh and maji (2004) Indian cement industries Relationship between
effective utilization of
current assets and
profitability of the
companies, although
there seemed to be a
wide range in the degrees
of such relationship
between company to
company

06. Biswas and ganguly(2001) Indian aluminum Very significant positive

Producing industry association
07. Govind rao and rao (1999) Indian cement industry Both positive as well as
negative correlations
08. Vijaykumar and Tamilnadu sugar industry Liquidity was negatively
venkatachalam (1995) associated with
profitability.
09. Vishmani at el., (2007) Company’s inventory Important role in its
management policy, profitability
debtors’ management Performance.
policy and creditors’
management policy
10. Padachi (2006) Small manufacturing Positively impacted on
firms its profitability.
11. Gamlath at el. (2012) Banking Positive relationship
between working capital
management &
profitability of
commercial banks in sri
lanka.

48
 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 management and

profitability of commercial banks in Nepal. It is based on recent 6 years data from F/Y

2015/16 to 2019/20. 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 27 commercial banks operating in Nepal. Out of them, there are

altogether 6 joint ventures viz. Nabil Bank Limited, Nepal SBI Bank Limited, Everest

Bank Limited, Standard Chartered Bank Nepal Limited, Himalayan Bank Limited and

Nepal Bangladesh Bank Limited.

These all 6 joint ventures banks have been taken as a sample for the study. These banks

are the pioneer leading bank in the context of deposit collection and loan disbursement.

3.3 Data Collection

This study is conducted on the basis of secondary data relating to working capital. The

secondary data have been extracted mainly through the annual report of NABIL, NSBI,

EBL, SCBL, HBL & NBB. Financial statements of last six fiscal years from F/Y 2015/16

to 2019/20 have been taken as sample data for evaluating working capital management

and its impact on profitability of commercial banks in Nepal.

49
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.

3.4 Data Validity and Reliability

To ensure validity and reliability of the data collected, only published data in the form of

financial statements which is a requirement by law was used. The boards of directors of

each bank, before publishing of any information have to attest to the validity and

reliability and ensure that the statements show a true and fair view of the bank’s financial

position. The NRB supervisory reports were also used which are published by the

regulator itself therefore ensuring correct data.

3.5 Data Analysis

The data collected is analyzed using the computer software known as Statistical Package

for Service Solution (SPSS) version 16.0. Descriptive, correlations and regression

analysis was applied to study and compare the effect of independent variables on the

dependent variable. Here, two tailed t-test is used since the sample size is greater than 30

with a 5% statistic test of significance.

In order to get a picture of the profitability of the banks; Net Profit Margin (NPM),

Return on Assets (ROA) and Return on Equity (ROE) which are measures of

Profitability, has been employed. NPM reflects the ratio of Net profit after tax to the

operating income. ROA reflects the ability of a bank’s management to generate profits

from the bank’s assets and was calculated as net profit after tax divided by Total assets.

50
ROE reflects the ability of a bank’s management to generate profits from the bank’s

equity and was calculated as net profit after tax divided by Total equity.

The dependent variables used in this research by including the Net Profit margin (NPM),

Return on Assets (ROA) and Return on Equity (ROE). While Working Capital

Management; Current Ratio (CR), Loan to Deposit ratio (LDR), Cash Ratio (CSR), Gross

Working Capital (GWL) and Net Working Capital (NWL) are taken as independent

variables. Based on the dependent variable, three multiple regression models have been

formulated as follows:

NPM = αi + β1CR + β2 LDR + β3 CSR + β4 GWL + β5 NWL + €it

ROA = αi + β1CR + β2 LDR + β3 CSR + β4 GWL + β5 NWL + €it

ROE = αi + β1CR + β2 LDR + β3 CSR + β4 GWL + β5 NWL + €it

Where,

NPM = Net Profit Margin

ROA = Return on Assets

ROCE = Return on Equity

CR = Current Ratio

LDR = Loans to Deposit Ratio

CSR = Cash Ratio

GWL= Gross Working Capital

NWL= Net Working Capital

αi is constant,

β1, β2, β3, β4 and β5 are coefficients of variables and €it is residual term.

51
In order to understand the relationship that exists between the working capital

management and the profitability, the following indicators have been calculated for the

commercial banks in the sample:

1. Net Profit Margin (NPM) = Profit after Tax (PAT) / Interest Income *100

2. Return on Assets (ROA) = Profit after Tax (PAT) / Total Assets * 100

3. Return on Equity (ROE) = Profit after Tax (PBT) / Total Equity *100

4. Current Ratio (CR) = Current Assets / Current Liabilities *100

5. Loan to Deposit Ratio (LSR) = Loans & advances / Deposits *100

6. Cash Ratio (CSR) = Cash and cash equivalents / Current Liabilities *100

7. Gross Working Capital (GWL) = Total Current Assets

8. Net Working Capital (NWL) = Total Current Assets – Total Current Liabilities

52
 CHAPTER –IV

OBSERVATION AND ANALYSIS

4.1 Data Introduction

This chapter presents the analysis of study findings of the investigation on the effect

of Working Capital Management on Profitability of commercial banks of EBL in

Nepal between the years 2015 to 2020. In the study variables which were included are

Net Profit margin (NPM), Return on Assets (ROA) & Return on Equity (ROE) and

Working Capital Management; Current Ratio (CR), Loan to Deposit ratio (LDR),

Cash Ratio (CSR), Gross Working Capital (GWL) and Net Working Capital (NWL).

This chapter analyses the variables involved in the study and estimates of the model

presented in the previous chapter.

Table 4.1: List of Variables

Explained Variables:
Variables Description
NPM Net Profit Margin
ROA Return on Assets
ROE Return on Equity
Explanatory Variables:
Variables Description
CR Current Ratio
LDR Loan to Deposit Ratio
CSR Cash Ratio
GWL Gross Working Capital
NWL Net Working Capital

4.2 Descriptive Analysis

The descriptive statistics of the explanatory and explained variables in this study are

presented in Table 4.2. It is based on a panel data set organized from joint ventures

53
commercial banks of EBL operating in the Nepalese financial market during the

period from 2015 to 2020. Looking at them, generally, the statistics indicate a wide

variability exist in the indicators of working capital management and profitability of

EBL banks.

Generally, from among all the indicators of working capital, Current ratio has

significant proportion. This implies that most of the commercial banks operating in

Nepal during the study period are adopting aggressive working capital policies to

enhance the profitability of banks. In relation to standard deviations, Cash ratio has

lower variability, which implies the maintenance of stable cash and cash equivalent

reserve to meet the demand for deposit withdrawals and other short term liabilities.

Table 4.2: Aggregate Mean Scores of WCM factors between 2015and 2018

Descriptive Statistics
Std.
N Minimum Maximum Mean Deviation
NPM 36 0 71 27.19 13.423
ROA 36 0 18 2.70 2.933
ROE 36 0 194 29.70 29.316
CR 36 53 103 81.75 13.588
LDR 36 39 78 65.83 11.313
CSR 36 4 36 16.01 7.285
GWL 36 49 90 73.85 11.195
NWL 36 -43 2 -16.75 12.624
Valid N
36
(listwise)

54
Correlation Analysis

Results on Table 4.3 show the correlations between variables of working capital

management and profitability of commercial banks, while holding the correlation coefficient

(r) value at between plus and minus one (-1.00 and +1.0).

Table 4.3: Correlation Table of NPM on WCM factors

NPM CR LDR CSR GWL NWL
NPM Pearson Correlation 1 .151 -.071 .393* .086 .159
Sig. (2-tailed) .379 .682 .018 .618 .355
N 36 36 36 36 36 36
CR Pearson Correlation .151 1 .832** .578** .981** 1.000**
Sig. (2-tailed) .379 .000 .000 .000 .000
N 36 36 36 36 36 36
LDR Pearson Correlation -.071 .832** 1 .039 .858** .832**
Sig. (2-tailed) .682 .000 .822 .000 .000
N 36 36 36 36 36 36
CSR Pearson Correlation .393* .578** .039 1 .522** .578**
Sig. (2-tailed) .018 .000 .822 .001 .000
N 36 36 36 36 36 36
GWL Pearson Correlation .086 .981** .858** .522** 1 .980**
Sig. (2-tailed) .618 .000 .000 .001 .000
N 36 36 36 36 36 36
NWL Pearson Correlation .159 1.000** .832** .578** .980** 1
Sig. (2-tailed) .355 .000 .000 .000 .000
N 36 36 36 36 36 36
*. Correlation is significant at the 0.05 level (2-tailed).

55
Table 4.3: Correlation Table of NPM on WCM factors
NPM CR LDR CSR GWL NWL
NPM Pearson Correlation 1 .151 -.071 .393* .086 .159
Sig. (2-tailed) .379 .682 .018 .618 .355
N 36 36 36 36 36 36
** ** **
CR Pearson Correlation .151 1 .832 .578 .981 1.000**
Sig. (2-tailed) .379 .000 .000 .000 .000
N 36 36 36 36 36 36
** **
LDR Pearson Correlation -.071 .832 1 .039 .858 .832**
Sig. (2-tailed) .682 .000 .822 .000 .000
N 36 36 36 36 36 36
* ** **
CSR Pearson Correlation .393 .578 .039 1 .522 .578**
Sig. (2-tailed) .018 .000 .822 .001 .000
N 36 36 36 36 36 36
** ** **
GWL Pearson Correlation .086 .981 .858 .522 1 .980**
Sig. (2-tailed) .618 .000 .000 .001 .000
N 36 36 36 36 36 36
** ** ** **
NWL Pearson Correlation .159 1.000 .832 .578 .980 1
Sig. (2-tailed) .355 .000 .000 .000 .000
N 36 36 36 36 36 36
The study on table 4.4 shows that Net Profit margin (NPM) has positive and

insignificant relation with Current Ratio (CR), Gross working capital (GWL) and

Net working Capital (NWL). NPM has negative and insignificant relation with Loan

to Deposit Ratio (LDR). However, it is positively correlated with Cash Ratio (CSR)

and has significant relation at 5% level of significance.

Table 4.4: Correlation Table of ROA on WCM factors

ROA CR LDR CSR GWL NWL

ROA Pearson Correlation 1 .230 .105 .311 .206 .231

56
Table 4.3: Correlation Table of NPM on WCM factors
NPM CR LDR CSR GWL NWL
NPM Pearson Correlation 1 .151 -.071 .393* .086 .159
Sig. (2-tailed) .379 .682 .018 .618 .355
N 36 36 36 36 36 36
** ** **
CR Pearson Correlation .151 1 .832 .578 .981 1.000**
Sig. (2-tailed) .379 .000 .000 .000 .000
N 36 36 36 36 36 36
** **
LDR Pearson Correlation -.071 .832 1 .039 .858 .832**
Sig. (2-tailed) .682 .000 .822 .000 .000
N 36 36 36 36 36 36
* ** **
CSR Pearson Correlation .393 .578 .039 1 .522 .578**
Sig. (2-tailed) .018 .000 .822 .001 .000
N 36 36 36 36 36 36
** ** **
GWL Pearson Correlation .086 .981 .858 .522 1 .980**
Sig. (2-tailed) .618 .000 .000 .001 .000
N 36 36 36 36 36 36
** ** ** **
NWL Pearson Correlation .159 1.000 .832 .578 .980 1
Sig. (2-tailed) .355 .000 .000 .000 .000
N 36 36 36 36 36 36
Sig. (2-tailed) .178 .541 .065 .228 .174
N 36 36 36 36 36 36
CR Pearson Correlation .230 1 .832** .578** .981** 1.000**
Sig. (2-tailed) .178 .000 .000 .000 .000
N 36 36 36 36 36 36
LDR Pearson Correlation .105 .832** 1 .039 .858** .832**
Sig. (2-tailed) .541 .000 .822 .000 .000
N 36 36 36 36 36 36
CSR Pearson Correlation .311 .578** .039 1 .522** .578**
Sig. (2-tailed) .065 .000 .822 .001 .000
N 36 36 36 36 36 36

57
 Table 4.3: Correlation Table of NPM on WCM factors
NPM CR LDR CSR GWL NWL
NPM Pearson Correlation 1 .151 -.071 .393* .086 .159
Sig. (2-tailed) .379 .682 .018 .618 .355
N 36 36 36 36 36 36
** ** **
CR Pearson Correlation .151 1 .832 .578 .981 1.000**
Sig. (2-tailed) .379 .000 .000 .000 .000
N 36 36 36 36 36 36
** **
LDR Pearson Correlation -.071 .832 1 .039 .858 .832**
Sig. (2-tailed) .682 .000 .822 .000 .000
N 36 36 36 36 36 36
* ** **
CSR Pearson Correlation .393 .578 .039 1 .522 .578**
Sig. (2-tailed) .018 .000 .822 .001 .000
N 36 36 36 36 36 36
** ** **
GWL Pearson Correlation .086 .981 .858 .522 1 .980**
Sig. (2-tailed) .618 .000 .000 .001 .000
N 36 36 36 36 36 36
** ** ** **
NWL Pearson Correlation .159 1.000 .832 .578 .980 1
Sig. (2-tailed) .355 .000 .000 .000 .000
N 36 36 36 36 36 36
GWL Pearson Correlation .206 .981** .858** .522** 1 .980**
Sig. (2-tailed) .228 .000 .000 .001 .000
N 36 36 36 36 36 36
NWL Pearson Correlation .231 1.000** .832** .578** .980** 1
Sig. (2-tailed) .174 .000 .000 .000 .000
N 36 36 36 36 36 36
*. Correlation is significant at the 0.05 level (2-tailed).

The study on table 4.5 shows that Return on Assets (ROA) is positively correlated with

all the variables of working capital such as Current Ratio (CR), Loan to Deposit Ratio
58
(LDR), Cash Ratio (CSR), Gross working capital (GWL) and Net working Capital

(NWL) and has insignificant relation with them.

Table 4.5: Correlation Table of ROE on WCM factors

Correlations
ROE CR LDR CSR GWL NWL
ROE Pearson Correlation 1 .105 .042 .197 .123 .106
Sig. (2-tailed) .544 .806 .249 .473 .539
N 36 36 36 36 36 36
CR Pearson Correlation .105 1 .832** .578** .981** 1.000**
Sig. (2-tailed) .544 .000 .000 .000 .000
N 36 36 36 36 36 36
LDR Pearson Correlation .042 .832** 1 .039 .858** .832**
Sig. (2-tailed) .806 .000 .822 .000 .000
N 36 36 36 36 36 36
CSR Pearson Correlation .197 .578** .039 1 .522** .578**
Sig. (2-tailed) .249 .000 .822 .001 .000
N 36 36 36 36 36 36
GWL Pearson Correlation .123 .981** .858** .522** 1 .980**
Sig. (2-tailed) .473 .000 .000 .001 .000
N 36 36 36 36 36 36
NWL Pearson Correlation .106 1.000** .832** .578** .980** 1
Sig. (2-tailed) .539 .000 .000 .000 .000
N 36 36 36 36 36 36
*. Correlation is significant at the 0.05 level (2-tailed).

59
The study on table 4.6 shows that Return on Equity (ROE) is also positively

correlated with all the variables of working capital such as Current Ratio (CR), Loan

to Deposit Ratio (LDR), Cash Ratio (CSR), Gross working capital (GWL) and Net

working Capital (NWL) and has insignificant relation with them.

4.3 Regression Analysis

The R2 is a measure of the goodness of fit of the working capital management

variables in explaining the variations in profitability of EBL banks in Nepal. The

regression analysis of NPM, ROA and ROE on Working capital management has

been separately analyzed below:

A) Regression Analysis of NPM on WCM

Based on the study, correlation coefficient (r) was .603 and the coefficient of

determination (r2) was .364 indicating that 36.4% of the profitability of EBL banks in

terms of Net Profit Margin (NPM) can be predicted by the WCM variables identified

in the study. Since the correlation of .364 is positive it can be concluded that the

correlation is statistically significant, hence there is a positive relationship between

working capital management and profitability of EBL banks in Nepal.

Table 4.6: Regression Analysis of NPM on WCM

Model Summary
Adjusted R Std. Error of
Model R R Square Square the Estimate
1 .603a .364 .258 11.561
a. Predictors: (Constant), NWL, CSR, GWL, LDR, CR

60
 ANOVAb

Sum of
Model Squares Df Mean Square F Sig.
1 Regression 2296.317 5 459.263 3.436 .014a

Residual 4009.464 30 133.649

Total 6305.780 35

a. Predictors: (Constant), NWL, CSR, GWL, LDR,CR

b. Dependent Variable: NPM

Coefficientsa

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 1692.477 738.969 2.290 .029
CR -17.029 7.489 -17.239 -2.274 .030
LDR 1.745 1.700 1.471 1.026 .313
CSR 2.464 1.720 1.337 1.433 .162
GWL -1.733 1.149 -1.446 -1.509 .142
NWL 17.879 7.992 16.816 2.237 .033
a. Dependent Variable:
NPM
Source: Research Findings 2019

B) Regression Analysis of ROA on WCM

Similarly on the basis of the study, correlation coefficient (r) was .468 and the

coefficient of determination (r2) was .219 indicating that 21.9% of the profitability of

EBL banks in terms of Return on Assets (ROA) can be predicted by the WCM

variables identified in the study. Since the correlation of .219 is positive it can be

concluded that the correlation is statistically significant, hence there is a positive

61
relationship between working capital management and profitability of EBL banks in

Nepal.

Table 4.7: Regression Analysis of ROA on WCM

Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .468a .219 .089 2.798

a. Predictors: (Constant), NWL, CSR, GWL, LDR, CR

ANOVAb
Sum of
Model Squares df Mean Square F Sig.
1 Regression 66.066 5 13.213 1.687 .168a
Residual 234.932 30 7.831
Total 300.998 35
a. Predictors: (Constant), NWL, CSR, GWL, LDR, CR
b. Dependent Variable: ROA

62
Coefficientsa
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 35.683 178.877 .199 .843
CR -.876 1.813 -4.058 -.483 .633
LDR .845 .412 3.259 2.053 .049
CSR .941 .416 2.339 2.261 .031
GWL -.353 .278 -1.347 -1.269 .214
NWL .359 1.934 1.547 .186 .854
a. Dependent Variable: ROA
Source: Research Findings 2017

C) Regression Analysis of ROE on WCM

The regression analysis of Return on Equity on variables of working capital

management is analyzed below:

Table 4.8: Regression Analysis of ROE on WCM

Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .430a .185 .049 28.583

a. Predictors: (Constant), NWL, CSR, GWL, LDR, CR

ANOVAb
Sum of
Model Squares df Mean Square F Sig.
1 Regression 5571.218 5 1114.244 1.364 .266a
Residual 24509.488 30 816.983
Total 30080.706 35
a. Predictors: (Constant), NWL, CSR, GWL, LDR, CR
b. Dependent Variable: ROE

63
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .430a .185 .049 28.583

Coefficientsa

Unstandardized Standardized
Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) 465.252 1827.048 .255 .801

CR -12.455 18.516 -5.773 -.673 .506

LDR 8.467 4.204 3.267 2.014 .053

CSR 9.479 4.252 2.356 2.229 .033

GWL -.640 2.840 -.244 -.225 .823

NWL 4.734 19.759 2.038 .240 .812

a. Dependent Variable: ROE

Source: Research Findings 2017

Likewise, correlation coefficient (r) was .430 and the coefficient of determination (r2)

was .185 indicating that 18.5% of the profitability of EBL banks in terms of Return

on Equity (ROE) can be predicted by the WCM variables identified in the study.

Since the correlation of .185 is positive it can be concluded that the correlation is

statistically significant, hence there is a positive relationship between working capital

management and profitability of commercial banks in Nepal.

64
 CHAPTER –V

RESULT AND DISCUSSION

5.1 Result Overview

The results are the findings of the research on the basis of observations and analysis. This

chapter includes the major results extracted from the analysis of data to determine the

relationship between Profitability of EBL banks and working capital management in the

65
Nepalese banking sector from 2015 to 2020. The various results from the descriptive,

correlation and regression analysis are discussed in this chapter.

5.2 Descriptive Analysis Result

The NPM has a mean value of 27.19% and standard deviation of 13.423%, ROA has a

mean value of 2.70% with standard deviation of 2.933% and ROE has a mean value of

29.70% with standard deviation of 29.316%. The mean value of the Current Ratio (CR) is

81.75%. Loan to Deposit Ratio (LDR) variable has the mean value of 65.83%. Standard

deviation of CR and LDR are 13.588% and 11.313% respectively.

Cash Ratio (CSR) has a mean of 16.01%. It has standard deviation of 7.285% which also

show there was low variability than all other variables used in the study. While the mean

value of Gross working capital (GWL) and Net working capital (NWL) are 73.85% and -

16.75% respectively. The mean value of Gross working capital implies that current assets

comprises almost three fourth portion of the total assets and the negative mean value of

Net working capital implies the portion of current liability is more than portion of current

assets. The standard deviation of GWL and NWL are 11.195 and 12.624 respectively.

5.3 Correlation Analysis Result

Net Profit margin (NPM) has positive and insignificant relation with Current Ratio (CR),

Gross working capital (GWL) and Net working Capital (NWL). NPM has negative and

insignificant relation with Loan to Deposit Ratio (LDR).

Return on Assets (ROA) is positively correlated with all the variables of working capital

such as Current Ratio (CR), Loan to Deposit Ratio (LDR), Cash Ratio (CSR), Gross

66
working capital (GWL) and Net working Capital (NWL) and has insignificant relation

with them

Return on Equity (ROE) is also positively correlated with all the variables of working

capital such as Current Ratio (CR), Loan to Deposit Ratio (LDR), Cash Ratio (CSR),

Gross working capital (GWL) and Net working Capital (NWL) and has insignificant

relation with them.

5.4 Regression Analysis Result

The result of regression analysis shows the goodness of fit of the working capital

management variables in explaining the variations in profitability of EBL banks in Nepal.

5.4.1 Result of Regression Analysis of NPM on WCM

The findings of the analysis is based on the significance level (alpha) of 0.05 (95%),

degrees of freedom (df) of 5, and two-tailed test indicated. The result show a positive

coefficient of determination (R2) indicating that: Net Profit Margin is influenced by

Current Ratio (CR), Loan to Deposit Ratio (LDR), Cash Ratio (CSR), Gross working

capital (GWL) and Net working Capital (NWL). In addition, the computed t-values:

Current Ratios (CR) (t= -2.274) and Net Working Capital (NWL) (t=2.237); are higher

than the significance threshold of 1.96 (0.05). This then indicate that there is a significant

relationship between Profitability of commercial banks and Current Ratio & Net Working

Capital.

The results indicate that Current Ratio and Gross Working Capital are negatively related

to Net Profit Margin (NPM), the profitability measure. The coefficient of determination is

-17.029 and – 1.733 respectively which indicates that the strong negative relationship

67
between them. These results provide reasonable evidence to the consistent view that, the

lower the investment in Current Assets will enhance the profitability of banks. The

negative coefficients means a 1% increase in Current Ratio will lead to a 17.029%

decrease in profitability on average other things remaining constant. Similarly, 1%

increase in Gross working capital will lead to a 1.733% decrease in profitability on

average other things remaining constant. Likewise coefficient of determination of Loan to

deposit ratio, Cash Ratio and Net Working Capital are 1.745, 2.464 and 17.879

respectively which shows positive relation to NPM.

5.4.2 Result of Regression Analysis of ROA on WCM

The findings of the analysis is based on the significance level (alpha) of 0.05 (95%),

degrees of freedom (df) of 5, and two-tailed test indicated. The result show a positive

coefficient of determination (R2) indicating that: Return on Assets is influenced by

Current Ratio (CR), Loan to Deposit Ratio (LDR), Cash Ratio (CSR), Gross working

capital (GWL) and Net working Capital (NWL). In addition, the computed t-values: Loan

to Deposit Ratio (LDR) (t= 2.053) and Cash Ratio (CSR) (t=2.261); are higher than the

significance threshold of 1.96 (0.05). This then indicate that there is a significant

relationship between Profitability of commercial banks and Loan to Deposit Ratio and

Cash Ratio.

The results indicate that Current Ratio and Gross Working Capital are negatively related

to Return on Assets (ROA), the profitability measure. The coefficient of determination is

-.876 and – .353 respectively which indicates negative relationship between them. These

results provide reasonable evidence to the consistent view that, the lower the investment

in Current Assets will enhance the profitability of banks. The negative coefficients means

68
a 1% increase in Current Ratio will lead to a .876% decrease in profitability on average

other things remaining constant. Similarly, 1% increase in Gross working capital will

lead to a .353% decrease in profitability on average other things remaining constant.

Likewise coefficient of determination of Loan to deposit ratio, Cash Ratio and Net

Working Capital are .845, .941 and .359 respectively which shows positive relation to

ROA.

5.4.3 Result of Regression Analysis of ROE on WCM

The findings of the analysis is based on the significance level (alpha) of 0.05 (95%),

degrees of freedom (df) of 5, and two-tailed test indicated. The result show a positive

coefficient of determination (R2) indicating that: Return on Assets is influenced by

Current Ratio (CR), Loan to Deposit Ratio (LDR), Cash Ratio (CSR), Gross working

capital (GWL) and Net working Capital (NWL). In addition, the computed t-values: Loan

to Deposit Ratio (LDR) (t= 2.014) and Cash Ratio (CSR) (t=2.229); are higher than the

significance threshold of 1.96 (0.05). This then indicate that there is a significant

relationship between Profitability of commercial banks and Loan to Deposit Ratio and

Cash Ratio.

The results indicate that Current Ratio and Gross Working Capital are negatively related

to Return on Assets (ROA), the profitability measure. The coefficient of determination is

-12.455 and – .640 respectively which indicates negative relationship between them.

These results provide reasonable evidence to the consistent view that, the lower the

investment in Current Assets will enhance the profitability of banks. The negative

coefficients means a 1% increase in Current Ratio will lead to a 12.455% decrease in

profitability on average other things remaining constant. Similarly, 1% increase in Gross

69
working capital will lead to a .640% decrease in profitability on average other things

remaining constant. Likewise coefficient of determination of Loan to deposit ratio, Cash

Ratio and Net Working Capital are 8.467, 9.479 and 4.734 respectively which shows

positive relation to ROE.

CHAPTER - VI

FINDINGS, CONCLUSION AND RECOMMENDATIONS

6.1 Findings

This study is aimed at establishing the general trend of Profitability of EBL banks and

working capital management in the banking sector Of EBL from 2015 to 2020 The

working capital explanatory variables of this study were decomposed into explanatory

70
variables as Current Ratio (CR), Loan to Deposit Ratio (LDR), Cash Ratio (CSR), Gross

working capital (GWL) and Net working Capital (NWL).

The pooled regression result shows that all variables of working capital have positive

effect on commercial banks profitability. In other words, working capital management

has positive effect on EBL banks profitability. This finding is coincides with the findings

of Gamlath et al (2012) who found that working capital management has positive effect

on commercial banks profitability in Sri Lanka.

From among all the variables only the loan to deposit ratio found negatively correlated

with the Net Profit Margin. However, it is found to be positively related with other

indicators of profitability such as ROA and ROE. This might be because of adjustment of

Provision of loan losses. ROA and ROE are treated as more valid indicators of

profitability, which are found to be positively correlated with all the variables of working

capital. Therefore, this study concludes that there is positive relation between working

capital management and profitability of EBLl banks in Nepal.

71
6.2 Conclusion

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 That EBL 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 EBL 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

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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 and

profitability of EBL bank in Nepal, especially with reference to Joint Ventures: . The

study covers a period of 5 Years (2015–2020). To achieve the objectives of the study,

secondary data have been analyzed. 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. An appropriate research methodology has

been developed which includes the descriptive analysis and correlation coefficient as

statistical tools. In order to test the relationship between the various components of

working capital, Karl Pearson’s correlation coefficient r is calculated and analyzed.

Finally, the major findings have been extracted from the analysis of data, and the

conclusion has been made on the basis of major findings. For the enhancement of the

profitability of the commercial banks, the recommendations have been given, considering

the major findings and conclusion, at the end of the study.

Based on the tests conducted on the data collected and the analyses of the results, this

study found a significant relationship between the working capital management

components (Current Ratio, Loan to Deposit Ratio, Cash Ratio, Gross Working Capital

and Net Working Capital) and the profitability of commercial banks in Nepal. The

finding of this study shows that all variables of working capital have positive effect on

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EBL bank profitability. In other words, working capital management has positive effect

on commercial banks profitability.

The working capital management has a great impact on the profitability with keeping an

optimal level of liquidity of the EBL banks in Nepal and the value of the managers of

EBL banks will have to increase value of the firm thereby controlling the level of optimal

working capital position. On basis of the above analysis we may further suggest that

these results can be further strengthened if the banking firms manage their working

capital in more efficient ways and to keep optimally liquid in order to attain required

profitable positions. In the banking industry Management of working capital fulfills the

role of maintaining cash converting power to pay their customers according to the

requirements so that the financial managers should concentrate to keep their liquidity

position and the bank should maximize their profit accordingly. If these banking firms

properly manage their funds in a proper way, this will ultimately increase profitability of

these companies.

6.3 Recommendations

There is much to be done by the researches about working capital in Nepal in future.

Also, this study suggests that further researches should be conducted on the same topic

with different variables. The scope of further research may be extended to the working

capital components management including cash, marketable securities, receivables and

inventory management etc. In addition, the following recommendations can be made in

order to ascertain the value addition of investors’ speculation.

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1. Working capital management standards and parameters should be established and

communicated to the investors. This will help investors to achieve the standard and take

better investment decisions.

2. Impact of socio-economic condition in the country should be considered when the

decisions are being taken, so that it is to identify the weaknesses of investment may be

best one to improve the firm’s financial performance (which decision into which

investment).

3. Forecasting working capital management information should be disclosed to the

existing and potential investors so that they can motivate to help to achieve the high level

of firm’s financial performance.

4. Political changes are very important factor in the share market. It is also determine the

firm performance. Therefore, political should possible to increase the financial

performance of the EBL bank.

5. Impact on inflation and exchange rate fluctuations is very important in managing short

term funding so that the financial managers of the specified banks should always

concentrate the optimal fund utilizing movements to attain high financial performance.

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