Important Notes for Banking

Provision To Be Maintained For Loan Loss

For the loans and bills purchase classified according to Directives no. 2, the following loan loss provision shall
be maintained based on the remaining amount of principal:

Loan classification Minimum Loan Loss Provision

Pass 1.3 percent
Watchlist 5 percent
Restructured 12.5 percent
Substandard 25 percent
Doubtful 50 percent
Loss 100 percent

Additional Provision (Special Cases):

1. If loans have been insured then only 25% of provision required as per normal
provision will have to be maintained.
2. If loans have been given under personal guarantee or corporate guarantee then
additional 20% will have to be provided.
3. If loans have been given under the security belonging to a third party then additional
20% will have to be provided.

However, This provisions will not be applicable in the following cases:

1. In case of security belonging to a close family member in case of loan taken by a
individual.
2. In case of security belonging to any of the partners or their close family member in
case of loan taken by a partnership firm.
3. In case of security belonging to any of the directors,promotors or their close family
member in case of loan taken by a company.

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 Capital Adequacy Norms
The qualifying regulatory capital shall consist of the sum of the following components: 1.
Tier 1 Capital (Core Capital)
A. Common Equity Tier 1 (CET1)
B. Additional Tier 1 (AT1)

Tier 1 Capital (Core Capital) (CET1 +AT1)

Common Equity Tier 1 (CET 1)

a Paid up Equity Share Capital

b Equity Share Premium
c. Proposed Bonus Equity Shares
d Statutory General Reserves
e Retained Earnings
f Un-audited current year cumulative profit/(Loss)
g Capital Redemption Reserve
h Capital Adjustment Fund
i Dividend Equalization Reserves
j Bargain purchase gain
k. Other Free Reserve
l. Less: Goodwill
m. Less: Intangible Assets
n. Less: Deferred Tax Assets
o. Less: Fictitious Assets
p. Less: Investment in equity in licensed Financial Institutions
q. Less: Investment in equity of institutions with financial interests
r. Less: Investment in equity of institutions in excess of limits
s. Less: Investments arising out of underwriting commitments
t. Less: Reciprocal crossholdings
u. Less: Purchase of land & building in excess of limit & unutilized
v. Less: Cash Flow Hedge
w. Less: Defined Benefit Pension Assets

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 x. Less: Un recognized Defined Benefit Pension Liabilities
y. Less: Negative balance of reserve accounts
z. Less: Other Deductions
Adjustments under Pillar II

- Less: Shortfall in Provision

- Less: Loans and Facilities extended to Related Parties and
Restricted lending
Additional Tier 1 (AT1)
a. Perpetual Non Cumulative Preference Share Capital
b. Perpetual Debt Instruments
c. Stock Premium

2. Tier 2 Capital (Supplementary Capital)

Supplementary Capital (Tier II)

a. Cumulative and/or Redeemable Preference Share

b. Subordinated Term Debt
c. Hybrid Capital Instruments
d. Stock Premium
e. General loan loss provision
f. Exchange Equalization Reserve
g. Investment Adjustment Reserve
h. Assets Revaluation Reserve
i. Other Reserves

a. Tier 1 Capital (Core Capital)

The key element of capital on which the main emphasis should be placed is Tier 1 capital,
which is comprised of equity capital and disclosed reserves. It consists of:

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A. Common Equity Tier 1 Capital
Common Equity is recognized as the highest quality component of capital and is the primary
form of funding which ensures that a bank remains solvent. It consists of the following
components:
I. Common shares issued by the bank.
II. Stock surplus (share premium) resulting from the issue of instruments included in common
equity tier 1.
III. Statutory General Reserve
IV. Retained Earnings available for distribution to shareholders
V. Un-audited current year cumulative profit, after all provisions including staff bonus and
taxes as well as regulatory adjustments. Where such provisions and regulatory adjustments
are not made, this amount shall not qualify as Common Equity Tier 1 Capital
VI. Capital Redemption Reserves created in lieu of redeemable instruments
VII. Capital Adjustment Reserves created in respect of increasing the capital base of the bank
VIII. Dividend Equalization Reserves
IX. Other free reserves if any
X. Bargain purchase gain arises on merger and acquisitions. However, prior approval of NRB is
required for it to include in Common Equity Tier 1 Capital.
XI. Any other type of instruments notified by NRB from time to time for inclusion in Common
Equity Tier 1 capital
Less: Deductions from Common Equity Tier 1 Capital:
a. Book value of goodwill and all other intangible assets
b. Deferred Tax Assets
c. Miscellaneous expenditure to the extent not written off
d. Investment in securities of financial institutions licensed by NRB
e. All investments in equity of institutions with financial interest
f. Investment in equity of institutions in excess of prescribed limits (Directive 8 – Limit of 10%
of CC in single institution and 30% of CC in total institutions and limit of maximum 10% paid
up capital in investee) (In case of company having financial interest only 20% of CC)
g. Investments arising out of underwriting commitments that have not been disposed within a
year from the date of commitment.
h. Reciprocal crossholdings
i. Cash flow hedge reserve
j. Defined benefit pension fund assets and liabilities
k. Negative balance of reserve accounts
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 l. Any instruments as stipulated by NRB from time to time.

B. Additional Tier 1 Capital It

consists of:
a. Perpetual Non-Cumulative Preference Shares (PNCPS) and Perpetual Debt Instruments issued
by bank.
b. Stock surplus (share premium) resulting from the issue of PNCPS instruments.
c. Less: Regulatory adjustments applied in calculation of Additional Tier 1 capital.

b. Tier 2 Capital (Supplementary Capital)

a. Preference Share Capital Instruments [Perpetual Cumulative PS/ Redeemable Non-
Cumulative PS/ Redeemable Cumulative PS] issued by the bank with the maturity of 5 years
or above;
b. Subordinated term debt fully paid up with a maturity of 5 years or above (Max 50% of Core
Capital to be included in Tier 2 capital);
c. Hybrid capital instruments combine certain characteristics of debt and certain characteristics
of equity;
d. Stock surplus (share premium) resulting from the issue of instruments included in Tier 2
capital;
e. General loan loss provision limited to a maximum of 1.25% of total Credit RWE (REPLACED).
However, from FY 2020/21, the limit of general loan loss provision is set to a maximum of
1.65% of total Credit RWE;
f. Exchange equalization reserves created by banks as a cushion for unexpected losses arising
out of adverse movement in foreign currencies;
g. Investment Adjustment Reserves;
h. Any other type of instruments notified by NRB from time to time to include in Tier 2 Capital;
i. Less: Regulatory adjustments applied in the calculation of Tier 2 Capital;
Capital Funds:
Common Equity Tier Capital Ratio = Common Equity Tier 1 Capital
Total Risk Weighted Exposure
Tier 1 Capital Ratio = Eligible Tier 1 Capital
Total RWE
Total Capital Ratio (Capital Adequacy Ratio) = Eligible Total Capital
Total RWE
Total RWE = Credit Risk + Market Risk + Operational Risk + Supervisory Adjustment under Pillar
II
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 Regulatory Capital As % to RWAs
1 Minimum Common Equity Tier 1 Ratio 4.5
2 Capital Conservation Buffer 2.5
3 Minimum Common Equity Tier 1 Ratio plus CCB 7.0
4 Minimum Tier 1 Capital Ratio (Excluding CCB) 6.0
5 Minimum Total Capital Ratio (Excluding CCB) 8.5
6 Minimum Total Capital Ratio (including CCB) 11.0

Calculation of Risk:

1. Credit Risk –
(I) Calculate Net Exposure
Gross Exposure xxx
Less: Specific Provision xxx
Less: Value of eligible credit risk mitigants xxx
Net Exposure xxx

(II) Net Exposure X Risk Weight(%) xxx

Total xxx

Supervisory Adjustments :
(I) 10% of loan in excess of SOL xxx
(II) 1% of credit sale agreement with xxx
Recourse facility
Total RWE on credit risk xxx

RISK WEIGHTED EXPOSURE FOR CREDIT RISK

Risk Weight
A. Balance Sheet Exposures

Cash Balance 0%

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 Balance With Nepal
0%
Rastra Bank
Gold 0%
Investment in Nepalese
0%
Government Securities
All Claims on
0%
Government of Nepal
Investment in Nepal
0%
Rastra Bank securities
All claims on Nepal
0%
Rastra Bank
Claims on Foreign
Government and 0%
Central Bank (ECA 0-1)
Claims on Foreign
Government and 20%
Central Bank (ECA -2)
Claims on Foreign
Government and 50%
Central Bank (ECA -3)
Claims on Foreign
Government and 100%
Central Bank (ECA-4-6)
Claims on Foreign
Government and 150%
Central Bank (ECA -7)
Claims On BIS, IMF, ECB, EC and
on Multilateral Development
0%
Banks (MDB's) recognized by
the framework
Claims on Other
Multilateral 100%
Development Banks
Claims on Domestic
100%
Public Sector Entity
Claims on Public Sector
20%
Entity (ECA 0-1)
Claims on Public Sector
50%
Entity (ECA 2)

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Claims on Public Sector
100%
Entity (ECA 3-6)
Claims on Public Sector
150%
Entity (ECA 7)
Claims on domestic
banks that meet capital 20%
adequacy requirements
Claims on domestic
banks that do not meet
100%
capital adequacy
requirements
Claims on foreign bank
20%
(ECA Rating 0-1)
Claims on foreign bank
50%
(ECA Rating 2)
Claims on foreign bank
100%
(ECA Rating 3-6)
Claims on foreign bank
150%
(ECA Rating 7)
Claims on foreign bank
incorporated in SAARC region
and China operating with a 20%
buffer of 1% above their
respective regulatory
Claims on Domestic
Corporate (Credit
50%
rating Score
equivalent to AAA)
Claims on Domestic
Corporate(Credit
rating Score 70%
equivalent to AA+ to
AA- )
Claims on Domestic
Corporate(Credit
rating 80%
Score equivalent to
A+ to A- )
Claims on Domestic
100%
Corporate(Credit

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 rating Score
equivalent to BBB+ &
below)
Claims on Domestic
100%
Corporate (Unrated)
Claims on Foreign
20%
Corporates (ECA 0-1)
Claims on Foreign
50%
Corporates (ECA 2)
Claims on Foreign
100%
Corporates (ECA 3-6)
Claims on Foreign
150%
Corporates (ECA 7)
Regulatory Retail
Portfolio (Not 75%
Overdue)
Claims fulfilling all
criterion of regulatory
100%
retail except
granularity
Claims secured by
60%
residential properties
Claims not fully
secured by residential 150%
properties
Claims secured by
residential properties 100%
(Overdue)
Claims secured by
Commercial real 100%
estate
Past due claims
(except for claim
150%
secured by residential
properties)
High Risk claims 150%
Investments in equity and
other capital instruments of
100%
institutions listed in the stock
exchange

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 Investments in equity and
other capital instruments of
150%
institutions not listed in the
stock exchange
Staff loan secured by
50%
residential property
Interest
Receivable/claim on 0%
government securities
Cash in transit and
other cash items in
20%
the process of
collection
Other Assets (as per
100%
attachment)

B. Off Balance
Risk Weight
Sheet
Exposures

Revocable
0%
Commitments
Bills Under
0%
Collection
Forward
Exchange
10%
Contract
Liabilities

LC Commitments With Original

Maturity Upto 6 months 20%
domestic counterparty
foreign counterparty (ECA
20%
Rating 0-1)
foreign counterparty (ECA
50%
Rating 2)
foreign counterparty (ECA
100%
Rating 3-6)

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 foreign counterparty (ECA
150%
Rating 7)
LC Commitments With Original
Maturity
50%
Over 6 months
domestic counterparty
foreign counterparty (ECA
20%
Rating 0-1)
foreign counterparty (ECA
50%
Rating 2)
foreign counterparty (ECA
100%
Rating 3-6)
foreign counterparty (ECA
150%
Rating 7)
Bid Bond, Performance Bond
and Counter guarantee 40%
domestic counterparty
foreign counterparty (ECA
20%
Rating 0-1)
foreign counterparty (ECA
50%
Rating 2)
foreign counterparty (ECA
100%
Rating 3-6)
foreign counterparty (ECA
150%
Rating 7)
Underwriting commitments 50%
Lending of Bank's Securities or
Posting of 100%
Securities as collateral
Repurchase Agreements, Assets
100%
sale with recourse
Advance Payment Guarantee 100%
Financial Guarantee 100%
Acceptances and Endorsements 100%
Unpaid portion of Partly paid
100%
shares and Securities
Irrevocable Credit commitments
20%
(short term)
Irrevocable Credit commitments
50%
(long term)

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Claims on foreign bank incorporated in
SAARC region operating with a buffer of
20%
1% above their respective regulatory
capital requirement
Other Contingent Liabilities 100%
Unpaid Guarantee Claims 200%

2. Operational Risk-

Particulars FY FY FY
...... ...... ......
Net Interest Income
Commission and Discount Income
Other Operating Income
Exchange Fluctuation Income
Addition/Deduction in Interest Suspense
during the period
Gross income (a)
Alfa (b) 15% 15% 15%
Fixed Percentage of Gross Income
[c=(a×b)]
Capital Requirement for operational risk
(d) (average of c)
Risk Weight (reciprocal of capital
requirement of 11%) in times (e)
Equivalent Risk Weight Exposure [f=(d×e)]
PILLAR-II ADJUSTMENTS
If Gross Income for all the last three years
is negative
Total Credit and Investment (net of
Specific Provision)

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Capital Requirement for operational risk
(5%)
Risk Weight (reciprocal of capital
requirement of 11%) in times
Equivalent Risk Weight Exposure [g]
Equivalent Risk Weight Exposure [h=f or g)

3. Market Risk-

S.No Currenc Open Open Relevan

. y Positio Positio t Open
n (FCY) n (NPR) Position
1 INR
2 USD
3 GBP
4 EURO
5 THB
6 CHF
7 ......
8 .......
9 .......
Total Open Position (a)
Fixed Percentage (b) 5%
Capital Charge for Market Risk [c=(a×b)]
Risk Weight (reciprocal of capital requirement of 11%) in times (d)
Equivalent Risk Weight Exposure [e=(c×d)]

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Supervisory Adjustments:
If the NRB is not satisfied with the risk management system adopted by a bank then it
can direct the bank to make either or all of the following adjustments.
1. Shortfall in provisions made by the bank against adversely classified assets
shall be deducted from the Tier 1 capital.
2. The loans and facilities extended to Directors, Employees (other than loans
given under Employee rules), Shareholders holding more than 1% percent
shares and related parties as well as loans, advances and facilities restricted
by the prevailing rules and regulations shall be deducted from Tier 1 capital.
3. In case the bank has provided loans and facilities in excess of its Single Obligor
Limits, 10% of all such excess exposures shall be added to the risk weighted
exposure for credit risk.
4. Where the bank has been involved in the sale of credit with recourse facility,
1% of the contract (sale) value shall be added to the risk weight for credit risk.
5. Where the banks do not have satisfactory Assets Liability Management
policies and practices to effectively manage the market risks, an additional risk
weight of 1% of Net Interest Income of the immediate previous financial year
shall be added to the risk weight for market risk.
Where the Net Interest Income of the immediate previous financial year is
negative, 1% of the total credit and investments net of specific provisions shall
be the capital charge for unsatisfactory ALM policies and practices.
6. Where the bank's net liquid asset to total deposit ratio is less than 20%, a risk
weight of 1% (as given in the table below) of total deposit, for each percent or
portion of percent shortfall in such ratio, is added to total of the Risk Weighted
Exposures.
Net liquid asset to A risk weight to be added to the Risk
total deposit ratio Weighted Exposures
19% - less than 20% 1% of total deposit
18% - less than 19% 2% of total deposit
17% - less than 18% 3% of total deposit
16% - less than 17% 4% of total deposit
15% - less than 16% 5% of total deposit and so on.
For this purpose, liquid assets include cash and bank balances, money at call
& short notice, placement upto 90 days and investment in government
securities. Borrowings repayable upto 90 days is deducted from liquid assets
to obtain net liquid assets.
Note: Aforesaid Provision shall be effective from Falgun end 2066 BS.

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 7. Where the banks do not adopt sound practices for the management of
operational risk, an additional capital charge of 2% to 5% of Gross Income of
immediate previous financial year shall be levied for operational risks.
8. Where the Gross Income determined for computation of capital charge of
Operational Risk for all of the last three years is negative and where the banks
themselves have not addressed the capital charge for operational risk, 5% of
the total credit and investments net of specific provisions shall be the capital
charge for operational risk.
New banks who have not completed a year of operation and hence whose gross
income cannot be measured reliably and where the banks themselves have
not addressed the capital charge for operational risk, shall also be required to
compute their capital charge for operational risk vide the same approach as
prescribed for banks with negative gross income. These banks may use the
gross income approach from second year onwards. But, based on the
reasonableness of the so computed capital charge for Operation Risk, during
the first three years of operation, review process may require additional
proportion of capital charge.
9. During the course of review, where the supervisor is not satisfied with the
overall risk management policies and procedures of the bank, the total risk
weighted exposures of the bank shall be increased up to 5%.
10. In case the bank has not achieved the desired level of disclosure requirements,
the total risk weighted exposures of the bank shall be increased up to 3%.
11. Banks that do not meet the eligibility requirements to claim the benefit under
credit risk mitigation techniques shall not be allowed the benefit of CRM.

Capital Conservation Buffer

The capital conservation buffer (CCB) is designed to ensure that banks build up capital buffers
during normal times (i.e. outside periods of stress) which can be drawn down as losses are
incurred during a stressed period. The requirement is based on simple capital conservation rules
designed to avoid breaches of minimum capital requirements.

The capital conservation buffer can be drawn down only when a bank faces a systemic or
idiosyncratic stress. A bank should not choose in normal times to operate in the buffer range
simply to compete with other banks and win market share. This aspect would be specifically
looked into by NRB during the Supervisory Review and Evaluation Process. If, at any time, a bank
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is found to have allowed its capital conservation buffer to fall in normal times, particularly by
increasing its risk weighted assets without a commensurate increase in the Common Equity Tier
1 Ratio (although adhering to the restrictions on distributions), this would be viewed seriously. In
addition, such a bank will be required to bring the buffer to the desired level within a time limit
prescribed by NRB.

Banks are required to maintain a capital conservation buffer of 2.5%, comprised of Common
Equity Tier 1 capital, above the regulatory minimum total capital requirement of 8.50%. Banks
should not distribute its earnings and reserves in the form of cash or/and stock dividends in case
the capital falls below this level. However, they will be able to conduct business as normal when
their capital levels fall into the conservation range as they experience losses. Therefore, the
constraints imposed are related to the distributions only and are not related to the operations of
banks.
Countercyclical Buffer
Losses incurred in the banking sector can be extremely large when a downturn is preceded by a
period of excess credit growth. These losses can destabilize the banking sector and spark a vicious
circle, whereby problems in the financial system can contribute to a downturn in the real
economy that then feeds back on to the banking sector.
The primary aim of the countercyclical capital buffer requirement is to use a buffer of capital to
achieve the broader macro prudential goal of protecting the banking sector from periods of
excess aggregate credit growth that have often been associated with the build-up of system- wide
risk. Protecting the banking sector in this context is not simply ensuring that individual banks
remain solvent through a period of stress, as the minimum capital requirement and capital
conservation buffer are together designed to fulfill this objective. Rather, the aim is to ensure
that the banking sector in aggregate has the capital on hand to help maintain the flow of credit
in the economy without its solvency being questioned, when the broader financial system
experiences stress after a period of excess credit growth. Therefore, excess aggregate credit
growth is judged to be associated with a build-up of system-wide risk to ensure the banking
system has a buffer of capital to protect it against future potential losses.
Nepal Rastra Bank has adopted the Credit to GDP ratio, macro-economic variable, as guide for
reference point for taking buffer decisions. Nepal Rastra Bank will monitor Credit to GDP ratio at
least annually and calculate Credit to GDP gap. If the credit-to-GDP ratio is significantly above its
trend (i.e. there is a large positive gap) then this is an indication that credit may have grown to
excessive levels relative to GDP.
The countercyclical buffer requirement will vary between zero and 2.5% of risk weighted
exposure, depending on the extent of the build-up of system-wide risk
Countercyclical Buffer Requirement
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 Credit to GDP Gap Buffer Requirement in Terms of CET 1
Up to 5 points 0%
above 5 to 7.5 points 0.50%
above 7.5 to 10 points 1.00%
above 10 to 12.5 points 1.50%
above 12.5 to 15 points 2.00%
above 15 points 2.50%
The banks shall maintain Countercyclical buffer from FY 2080/81.

New Changes in NRB Directives 2078 and updates of NRB circulars

issued on Shrawan 2079:
Changes in computation of Capital Adequacy Ratio (Dir 1)
• In case of OD loan, mortgage loan, personal term loan where land is kept as collateral, then
for Loan to Value ratio, 30% for land inside KTM (previously 40%), and 40% for land outside
KTM (previously 50%).
• In case of loan given to priority sectors for construction of IT park and Industrial park, no
premium higher than 2% shall be levied in Base Rate.

Effects on RWE:
1. Personal Overdraft – RWE 150%
2. Personal Hire Purchase/ Personal Auto Loans – RWE 150%
3. Real estate loan for land acquisition and development – RWE 150%
4. Lending against shares (above Rs.2.5 million) – RWE 150%
5. Lending against shares (up to Rs.2.5 million) – RWE 100%
6. Lending against bond – RWE 100%
7. Trust Receipt Loan for Trading Firms – RWE 120%
8. Bid Bond, Performance Bond& Counter Guarantee with Domestic Counterparty – RWE 40%

Risk (Dir 5)
Debentures shall be allowed to be counted in deposits while computing CD ratio till 2080 Asadh
End.

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Loan Loss Provision (Dir 7)
If NRB on its supervision report recommends for increasing LLP, but the previous quarterly
financial statements / previous annual financial statements have not been published yet, then
the effect of LLP as recommended by NRB shall be given effect in these financial statements.
Shareholding Pattern (Dir 10)
If any shareholder holding 1% or more promoter shares in any one bank or financial institution
shall obtain pre-approval of NRB for purchasing/selling the sales of another bank or financial
institution.
Priority Sector Lending (Dir 17)
Sector 2079 A 2080 A 2081 A 2082 A
End(%) End(%) End(%) End(%)
Agriculture 12 13 14 15

Energy 6 7 8 10

Cottage, Small & Medium (Loan less 11 12 13 15

than Rs.1 crore)

Bank Rate & IRC (Dir 21)

• Bank Rate (SLF) changed from 7% to 8.5%.
• IRC- 4%, 5.5% & 7% changed to 5.5%, 7% (policy rate) & 8.5% (bank rate).
• CRR changed from 3% to 4% (for all A, B & C class BFIs) with effect from 2079 Bhadra 12.
• SLR changed: A – from 10% to 12%; B- from 8% to 10% and C- from 7% to 10% with effect from
2079 Poush End.
• The difference between interest rate of institutional FDs and Individual FDs must be at least of
2% (Previously 1%). Note that Individual FDs interest rates are higher.
• The limit to provide cash dividend by BFIs of 30% of net distributable profit is no more.

Loan Loss Provisioning (Dir 2)

• In case of Watch-list category, “Even though principal and interest payment is regular,
borrower is having net loss or negative net worth since three (previously two) consecutive
years. But in case of project under construction, the net loss or negative net worth for
consecutive three full (previously two) fiscal years shall be considered only after initiation of
commercial production.
• Multiple banking loans and advance of Rs.2 arab (previously Rs.1 arab) or more not converted
into consortium financing.
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• LLP for pass loan increased from 1% to 1.3% from FY 2077/78.
Single Obligor Limit (Dir 3)
Margin Lending from same B&FI – Rs.4 cr and from all B&FIs – Rs.12 cr. But NRB circular on
Shrawan 18 has removed Rs.4 cr limit. Also, in case of loan renewal or additional lending check
whether the limit of 12cr has been maintained or not. If limit breached, then such loan shall be
classified as bad and 100% provisioning to be made.
Distributable income (Dir 4)
Out of the income booked in Other Comprehensive Income, 20% shall be transferred to General
Reserve and balance 80% shall be distributable.
Investments (Dir 8)
If B&FIs have made investment in shares (public), then it shall be disposed only after completion
of one-year period of investment provided the annual trading limit shall be only 1% of Core
Capital. However, the investments made before 2078 Jestha 10 can be disposed at any time
before Asadh End 2079.
Also, no investments shall be made in “D” class financial institutions i.e. Laghubitta Bittiya Sanstha
(Unless invested to fulfill Deprived Sector Lending). Also, investment made before 2078 Jestha 10
shall be disposed within 2078 Poush End.
Deposits Collection (Dir 16)
No any commercial banks shall open interest bearing FCY bank accounts at each other. Previously,
one commercial bank can open FCY interest bearing call/fixed deposit account at another
commercial bank. However, due to reporting of duplicate deposits and fake presentation of
accounts, this provision was amended

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