CHAPTER-I

INTRODUCTION

1.1 Background of the study

The word ‘Bank’ has been derived from the Italian word ‘Banco’ which means a place for
keeping, lending and exchanging money, the bank is a financial institution, which deals
with money. It accepts deposits from individuals and organizations and grant loans to
them it allows interest on the deposits made and charges interest on the loan granted.
Since, it accepts deposits and grant loans, it is regarded as the trader of money. Further,
it creates credit and supports for the formation of capital and hence it is regarded as
manufacturer of money.

The following are some of the main definitions given by different economist:
“A bank is an organization whose principal operations are concerned with the
accumulation of the temporarily idle money of the general public for the purpose of
advancing to others for expenditure.” -Kent

“Bank is an institute which collects money from those who have it to spare and who are
saving it out of their income and lends this money out to those who required-Crowther

“Bank is an organization established for the purpose of exchange money deposit lending
money and participation in transactions.”

Commercial bank Act of 2031(Nepal)

From the above definitions, it is clear that the bank is a financial institution, which
accepts deposits from the public in different accounts and grant loans to individuals and
corporations against their securities. The difference in interest rate on lending and
deposit, interest rate spread, is the major source of income for the bank. Interest on
lending is higher than the deposits. It is an agent of its clients, which remits money,
collects incomes and pays expenses on behalf of them. It performs the wide variety of
functions, which provide utility to the individual, corporation and general public.

1
History
The history of banking is nearly as old as civilization. In the ancient Rome and Greece,
the practice of storing precious metals and coins at safe places and loaning out money
for public and private purpose on interest was prevalent. In England, banking had its
origin with the London goldsmith who in the 17th century began to accept deposits
from merchants and other for safe keeping of money and other valuables. As public
enterprises, banking made its first appearance in Italy in 1157AD when the “Bank of
Venice” was founded.
Linguistic (the science of language) and Etymology (the study of the origin of words)
suggest an interesting story about the origin of the word “bank”. Both the old French
word “Banque” and the Italian word “Benca” were used centuries ago to mean a “bench”
or “money changer’s table.” Banks are among the most important financial institutions
whose principle operation are concerned with a accumulation of the temporarily idle
money with the general public for the purpose of advancing it to others for expenditure.
Thus, the word banking has been used to denote a certain kind of trading in money. A
bank is thereafter a corporation that deals in credit i.e. accept deposits from public,
withdrawing by cheques and advances loans of various sorts.

The modern economic system cannot function without bank. According to the modern
concept, banking is a business that not only deals with borrowing, lending and
remittance of funds, but it is also important instrument for fostering economic growth.
Presently there are various types of banks are established for instance, industrial bank,
commercial bank, agricultural bank, joint stock bank, co-operative bank and
development bank with different purpose.

1.2 Introduction of NMB Bank Ltd.

NMB Bank Ltd (erstwhile Nepal Merchant Banking & Finance Ltd) had been financially
institutionalized in the year 1996 A.D. in Durbarmarg, Kathmandu. Currently it has its
head office situated in Babarmahal, Kathmandu near the CDO office. It is promoted by
members of leading business conglomerates in association with Yong Lian Reality,
Malaysia and Employee Provident Fund of Nepal. It is one of the leading Merchant
(Investment) Banker at present in Nepal. It also enjoys number one status among the

2
existing finance companies in terms of, profitability, market capitalization, deposits,
Risk Assets and Net Worth.

Growing from strength to strength, NMB managed to upgrade itself to a commercial

bank in 12 years. It is the first finance company in Nepal to become a commercial bank.
NMB is a public limited company with NPR 1 billion in paid-up capital including 25% of
the shares held by the general public.

1.3 Statement of the Problem

Nepal is the country which is made up of villages and rural areas mostly and where
there is predominance of agriculture sector. It is very difficult to solve the problem of
credit through commercial banks and very nominal population of the country is using
banking facilities.

Presently, our economy is in critical phase due to political uncertainty, labor-

management conflict, power crises and so on. In such as situation banking system are
facing different problems which has created to increase risks in the operation of
banking and financial institutions. The problem like liquidity crisis, uncertain directives
by NRB, increase in interest rates, fraud, etc.

The commercial banks are facing a huge burden due to excessive competition from rural
banks, finance companies and local co-operatives, which provide loans to the local
customers. In addition, the large numbers of commercial banks in the economy is the
emerging challenges for commercial banks. Therefore, NRB should take every step very
carefully to stabilize the economy and banking sector should take adequate decision to
decrease risks.
This study raise some issued to be examined which are stated as below:
 What are the major factors affecting cash management policy ?
 How the Bank is operating its cash management in this competitive market ?
 What is the status of credit administration and credit recovery process of the
bank ?
 How is the non-performing cash is affecting is cash management? Is writing off of
non-performing assets satisfactory ?

3
1.4 Objectives of the Study
The financial institution play very vital role in the economic development of the nation.
The efficient performance of the banks and financial institution give shape to economic
indicators of the nation. The main purpose of this study is to examine the way and
techniques used by NMB Bank in Cash Management. Study will cover the areas where
cash are managed by bank.

The major objectives of the study are to examine the management of cash of NMB Bank.
Therefore, the basic objective is as follows:

 To examine the cash management practice followed by the organization

 To examine how the bank is following the norms of NRB with regard to cash
management
 To analyze the relationship between the deposits collected and loan distributed
by the bank
 To analyze the effective utilization of surplus of cash

1.5 Significance of the study

Banking sector plays an important role in the economic development of the country.
Cash management is a most important and crucial part of business. Business could not
run without having enough cash. Proper management in cash is needed for smooth flow
of business.

The expected significance of this study is as follows:

 The finding of the study helps to know the ways of cash management of NMB.
 Study will be useful and provide guideline for further researches in similar area
 It is expected that the study will help the people to get information about cash
management strategy in NMB

4
1.6 Literature Review
Review of literature is a stocktaking of available literature in the field of research. It
supports the researcher to explore the relevant and true facts for the reporting purpose
in the field of research study. Literature here means the related printed material about
the subject matter of the research work. It may be in various forms like book, booklet,
thesis, reports etc in the courses of research, review of existing literature would help to
check the chance of duplication in the present study. One can find what study has been
conducted and what remains to go with. Review of literature is vital while doing
research work as it gives the finding of the previous study. It can be used as a secondary
data’s; it gives the valuable information about the subject.

This chapter highlights the literature available related to the present study. This chapter
has been divided into three main sections. First section encompasses the conceptual
framework. The second section presents the review of previous research work (thesis)
on the topic. The final section explains he research gap.

1.6.1 Conceptual Review

Banking, transactions carried on by any individual or firm engaged in providing
financial services to consumers, businesses, or government enterprises. In the broadest
sense, banking consists of safeguarding and transfer of funds, lending or facilitating
loans, guaranteeing creditworthiness, and exchange of money. These services are
provided by such institutions as commercial banks, savings banks, trust companies,
finance companies, and merchant banks or other institutions engaged in investment
banking. A narrower and more common definition of banking is the acceptance,
transfer, and most important, creation of deposits. This includes such depository
institutions as commercial banks, savings and loan associations (more common in the
United States), building, societies, and mutual savings banks. All countries subject
banking to government regulation and supervision, normally implemented by central
banking authorities. For further information on central banks and investment banking,
see the relevant articles.

5
1.6.2 Review of Previous work
Pant, R.P. (2001), Pant has studied on “A study of deposit and its utilization by
Commercial Bank in Nepal.” The main objective of the study is to test whether lending
process is significant and to find out the way to encourage mending by increasing bank
deposit. The finding of the study is; commercial banks in Nepal are not able to satisfy
the financial need of the economy, commercial banks in Nepal are not playing active
role to utilize their resources collected from different sector, according to the need of
the economy. He has recommended the new branches should be open.

Acharya, N. (2001), “Deposit mobilization of commercial bank in Nepal”. The main

objective is to analyze the impact of interest rate on deposit mobilization as well as
credit ratio increase or decrease as the change in interest rate. Besides this, the
objective is to know the efficient utilization of the accumulated deposits. She has found
that the commercial bank have not been successful in the mobilization of the deposits
collected by the commercial banks. It is because of the fact that the commercial banks
have not able to motivate and facilitate to their cents except at change in the rate of
interest. The problems are to attracting the savings to the maximum possible extent to
channeling these savings into these savings into those sectors of the economy where
there are most needed and to extending banking facilities in the country to unbanked
areas. The changes of interest rates in loan are also recommended. Commercial banks
should extend long term and medium term credit in addition to short term credit.

Joshi, D.(2002), “A study on Commercial banks of Nepal with Reference to Financial

Analysis of Rastriya Banjiya Bank” is the study conducted to direct the financial position
of the bank and recommended the essential suggestion to that bank.

Adhakari (2008), in his thesis paper, "A Study of Commercial Banks Deposit and Its
Utilization" got to notice that the percentage of the total credit supplied by commercial
banks within five years period (2000-2007) is more or less same while in the collection
of deposits. The percentage has increased too much. Thus, the increasing gap between
collection and utilization shows economic requirement and to contribute the economic
upliftment of the country, commercial bank should affair sector wise and planned
policy, he suggested.

6
1.7 Research Methodology
Research is effort of search new fact, knowledge and principle in scientific ways. To
generate knowledge, investigation or enquiry in the phenomenon of the explored or
unexplored area necessitated the research work. The research requires different
methodologies, tools, techniques, etc. This chapter attempts to explain the methodology
of the research undertaken. This chapter contains research design, source of data,
population and examples, method of data collection.

1.7.1 Research Design

"Research design is the plan, structure and strategy of investigation conceived so as to
obtain answer to research question and control variance. The plan mean now
researcher investigator collect the data structure in term controlling the data in term of
money and time." The plan mean now researcher investigators collect the data
structure in term controlling the data in term of money and time. We can say that the
research design is specific action of methods and procedures for acquiring the
information needed. It is the plan, structure and strategy of investigation conceived so
as to obtain answer to research questions and to control; variances. It is the overall
operational pattern of framework of the projects that stipulates what information is to
be collected from which sources by what purpose. A good design will ensure that the
information obtained is relevant to the research question and that it was collected by
objective and economically procedure. The main objective of research design is to make
analysis of financial performance of commercial banks with reference to NMB Bank Ltd.
The research analyzes the financial performance of commercial banks in Nepal and
provides valuable recommendation. In other words, this research is aimed at studying
profit through analyzing financial ratio of NMB Bank Limited. This will follow analytical
and descriptive research design. It also analyzes the composition of trend of total
deposit, total assets, investment and profitability condition of commercial banks. The
design for this research is made by collection of information from different sources by
using various financial and statistical tools.

7
1.7.2 Source of Data
There are two sources of data, primary and secondary. But only secondary data has
been used in this search.

Secondary Source:
This refers to data that are already used and gathered by others. Secondary data are
mostly used for this research purpose. So the major sources of secondary data are as
follows:
 Annual general report of NMB Bank Ltd from 2064/65 to 2067/68
 National newspaper, journals, magazine, and reports for Central Library of T. U.,
Library of Shanker Dev Campus.
 Internet and various website

1.7.3 Population & Sample

All a commercial banks currently operation in Nepal is the population. On the basis of
the researcher's judgment, the study will cover only 1 sample out of all the banks, viz.
NMB.

1.7.4 Data Processing procedure

The data analysis tools are applied as simple as possible. Data obtained from various
sources cannot directly be used in their original form. They need to further verify and
simplify the data for the purpose of analysis. Data, information, figures and facts
obtained need to be checked, rechecked, edited and tabulated for computation.
According to the nature of data, they have been inserted in meaningful tables, which
have been shown I appendices. Homogeneous data have been sorted in one table and
similarly various tables have been prepared in understandable manner, odd data are
excluded from the table. Data have been analyzed and interpreted using financial and
statistical tools. The detail calculations that cannot be shown in the body part of the
report are presented in appendices at the end of the report.

8
1.8 Limitation of the study
The study tries to find out the strategy and techniques of cash management of NMB. The
researcher will try to cover most of the information regarding the topic, but still there
are certain limitations. The limitation of the study is as follows:
 Report covers a period of four fiscal years data due to the time constraint.
 The study is based to know the techniques of cash management of NMB bank did not
disclose much.
 Study is based on secondary data.
 Time constraints are one of the main limitations of the study because it must be
submitted within stipulated period of time.
 It is only for partial fulfillment of MBA.

1.9 Organization of the Study

This whole study will be divided into five chapters, each one focusing on a particular
area. The units will be listed in the contents.

Chapter I
The first chapter includes general background, statement of the problem, objectives of
the study, significance of the study, and limitations of the study and organization of the
study.

Chapter II
The second chapter includes conceptual framework along with review of published and
unpublished reports, booklets, journals, magazines, research work and thesis and useful
website relating to liquidity.

Chapter III
The third describes the various sequential steps that will be strictly followed in
conducting this research. Different financial as well as statistical tools have been used to
find out the actual performance of the two banks. The main financial tool adopted to
analyze the data is accounting ratio. Other simple statistical analysis such as standard
deviation, coefficient of variation, etc. will be calculated where necessary. Moreover, the
forecasting of the next five years data will be done with the help of regression.

9
Chapter IV
This chapter deals with the static evidence and facts to clarify the research work. Here,
the study presents the collected data for various purpose of analysis to obtain the
answer to the research question. Here, the calculations of different accounting rations
and their applications will be presented.

Chapter V
Finally, the fifth chapter is the conclusion of the research. On the basis of the data
analyzed the research will reach in final phase to conclude the analysis of this chapter.
This chapter further deals with the major findings, prevailing issues and gaps of the
concerned banks. The suggestions to the related banks will also be given which will help
the bank to improve the company in many ways.

10