Commercial Bank Management

Projected available funds gap = Projected liquidity sources − Projected liquidity uses.

Projected sources:

• New deposit inflows = Rs.600 million
• Securities sold = Rs.1,500 million
  Total sources = Rs.2,100 million

Projected uses:

• Deposit withdrawals = Rs.1,050 million
• New loan demand = Rs.800 million
• Approved credit line drawdowns = Rs.800 million
• New securities purchased = Rs.200 million
  Total uses = Rs.2,850 million

$$\text{Available funds gap} = 2{,}100 - 2{,}850 = -750 \text{ million}$$

Projected available funds gap = Rs.750 million deficit (negative gap).
The bank expects a liquidity shortfall of Rs.750 million next month.

Nepal Rastra Bank (NRB) — Institutional Mechanism for Regulation and Supervision of the Banking Industry

Nepal Rastra Bank, established on 14 Baisakh 2013 BS (26 April 1956) under the Nepal Rastra Bank Act, 1955 and currently governed by the Nepal Rastra Bank Act, 2058 (2002), is the central bank and the sole monetary, regulatory and supervisory authority of the banking and financial system of Nepal. Its regulatory and supervisory mechanism operates through a well-defined institutional structure, legal framework, and set of supervisory tools.

1. Legal and Policy Framework

• Nepal Rastra Bank Act, 2058 (2002) — the principal law that gives NRB the power to license, regulate, inspect, supervise and, if necessary, liquidate banks and financial institutions (BFIs).
• Bank and Financial Institutions Act (BAFIA), 2073 (2017) — the umbrella Act governing the establishment, operation, merger, acquisition and liquidation of BFIs, and empowering NRB to issue directives and take corrective action.
• Other supporting laws — Foreign Exchange (Regulation) Act 2019, Nepal Rastra Bank (Inspection and Supervision of Banks and Financial Institutions) Bylaws, and the Payment and Settlement Act.
• Directives (Nirdeshan) — NRB issues annual unified directives on capital adequacy, loan classification, provisioning, liquidity, corporate governance, anti-money laundering, consumer protection, etc., which are binding on all BFIs.

2. Organizational Structure within NRB

• Board of Directors — the apex policy-making body, chaired by the Governor, which approves licensing, supervisory policies, and major regulatory decisions.
• Governor and Deputy Governors — the Governor is the chief executive and is responsible for overall supervision; Deputy Governors look after specific areas such as supervision, monetary policy and foreign exchange.
• Banks and Financial Institutions Regulation Department (BFIRD) — deals with licensing, registration, capital adequacy, mergers and acquisitions, and regulatory compliance.
• Banks and Financial Institutions Supervision Department (BFISD) — conducts off-site surveillance and on-site inspection of commercial banks.
• Other specialized departments — the Development Bank Regulation and Supervision Department, the Microfinance Institution Supervision Department, the Payment Systems Department, the Foreign Exchange Management Department, and the Financial Intelligence Unit (FIU) for anti-money laundering.
• Provincial and regional offices — NRB has branch offices in all seven provinces (e.g., Biratnagar, Janakpur, Pokhara, Butwal, Nepalgunj, Dhangadhi) to supervise BFIs at the regional level.

3. Licensing and Entry Regulation

NRB is the sole authority to grant a licence to establish a bank or financial institution. It prescribes minimum paid-up capital, promoters' qualifications, fit-and-proper criteria for directors and managers, and business plans. No BFI can commence business without NRB's licence, and any change in capital, management or branch expansion requires NRB approval.

4. Supervisory Tools and Techniques

• Off-site surveillance — BFIs must submit periodic returns (daily, monthly, quarterly, annual) on deposits, loans, liquidity, capital adequacy, non-performing loans (NPLs), and profitability. NRB analyzes these through its Supervision Information System (SIS) and CAMELS-based rating framework.
• On-site inspection — NRB inspection teams conduct regular, full-scope and targeted inspections of BFIs to verify asset quality, loan classification, provisioning, internal control, and compliance with directives. Special inspections are carried out on suspicion of irregularities.
• CAMELS rating — Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk are assessed to assign a composite rating (1 to 5), which determines the intensity of supervision.
• Corrective and punitive actions — depending on the rating and severity of violations, NRB may issue warnings, impose fines, restrict new lending or branch expansion, suspend directors or managers, appoint a management committee, or recommend liquidation.
• Statutory audit and disclosure — BFIs must appoint NRB-approved auditors, publish audited financial statements, and disclose key financial indicators to the public.

5. Coordination and Supporting Institutions

• Ministry of Finance — NRB coordinates on macro-financial policy and reports periodically to the Ministry.
• Deposit and Credit Guarantee Corporation (DCGC) — protects small depositors and supports financial stability.
• Credit Information Bureau (CIB) — provides credit information on borrowers to help BFIs assess credit risk.
• Financial Intelligence Unit (FIU) — monitors suspicious transactions and enforces anti-money laundering and counter-financing of terrorism (AML/CFT) rules.
• Nepal Bankers' Association — acts as a consultative body between NRB and the banking industry.

6. Recent Reforms

NRB has adopted risk-based supervision (RBS), consolidated supervision of bank groups, Basel III capital standards, prompt corrective action (PCA) framework, and a merger/acquisition policy to reduce the number of BFIs and strengthen the banking system. It has also strengthened its off-site supervision through digital reporting and data analytics.

Conclusion

Thus, NRB's institutional mechanism for regulation and supervision rests on a strong legal foundation, a specialized organizational structure, a dual off-site and on-site supervisory system, and a range of corrective tools. Through licensing, continuous surveillance, inspection, CAMELS rating and enforcement, NRB maintains the soundness, stability and public confidence of Nepal's banking industry.

Classification of the capital components (Rs. million)

i. Tier-one (core) capital

Tier one consists of permanent equity: common stock, perpetual preferred stock, reserves, undivided profits and surplus.

$10 + 6 + 25 + 15 + 4 = \text{Rs. } 60 \text{ million}$

ii. Tier-two (supplementary) capital

Tier two consists of loan loss reserves, subordinated debt and limited-life preferred stock. They are less permanent or have a fixed life.

$20 + 35 + 15 = \text{Rs. } 70 \text{ million}$

iii. Total risk-weighted assets

iv. Is tier-one capital enough?

$\text{Tier-1 ratio} = \frac{60}{1520} = 3.95\%$

The Basel minimum is 4% of risk-weighted assets, which needs $0.04 \times 1520 = \text{Rs. } 60.8$ million. The bank has Rs. 60 million, a shortfall of about Rs. 0.8 million. So tier-one capital is not quite sufficient. The bank should retain more profit or issue common or perpetual preferred stock.

v. Is total capital enough?

$\text{Total capital} = 60 + 70 = \text{Rs. } 130 \text{ million}$

$\text{Total capital ratio} = \frac{130}{1520} = 8.55\%$

The Basel minimum is 8% (Rs. 121.6 million). The bank has enough total capital on the figures as given, a cushion of about Rs. 8.4 million. The adequacy comes mainly from tier-two capital (Rs. 70 million).

The bank still fails the tier-one requirement. Regulators also limit the amount of tier two that counts, for example loan loss reserves up to 1.25% of risk-weighted assets and subordinated debt and limited-life preferred up to 50% of tier one. Under such limits the counted capital would be lower. The bank should therefore build up its core capital.

Given: Total assets $A = Rs.\ 600$ million; total liabilities $L = Rs.\ 550$ million; equity $E = Rs.\ 50$ million.

a. Duration of bank assets

[ D_A=\frac{\sum A_iD_i}{A} ] [ D_A=\frac{180(7.49)+40(1.50)+200(0.60)+100(1.20)+80(2.25)}{600} ] [ D_A=\frac{1348.2+60+120+120+180}{600} =\frac{1828.2}{600} =3.047\text{ years} ]

Duration of assets = 3.047 years.

b. Duration of bank liabilities

[ D_L=\frac{\sum L_iD_i}{L} ] [ D_L=\frac{200(1.943)+250(2.750)+100(3.918)}{550} ] [ D_L=\frac{388.6+687.5+391.8}{550} =\frac{1467.9}{550} =2.6689\text{ years} ]

Duration of liabilities = 2.6689 years.

c. Duration gap

[ DGAP=D_A-\frac{L}{A}D_L ] [ DGAP=3.047-\left(\frac{550}{600}\right)(2.6689) ] [ DGAP=3.047-2.4465=0.6005\text{ years} ]

Duration gap = 0.6005 years.

Interpretation: The bank has a positive duration gap. This means its assets are more sensitive to interest rate changes than its liabilities. Therefore, if interest rates rise, the bank’s net worth will fall; if interest rates fall, net worth will rise.

d. Change in net worth when interest rate rises from 8% to 10%

[ \Delta NW=-DGAP \times A \times \frac{\Delta i}{1+i} ] Here, $\Delta i=0.10-0.08=0.02$ and $i=0.08$. [ \Delta NW=-0.6005 \times 600 \times \frac{0.02}{1.08} ] [ \Delta NW=-0.6005 \times 600 \times 0.0185185 ] [ \Delta NW=-6.6722\text{ million} ]

Net worth decreases by Rs. 6.6722 million.
New net worth $=50-6.6722=Rs.\ 43.3278$ million.

e. Change in net worth when interest rate falls from 8% to 6%

Here, $\Delta i=0.06-0.08=-0.02$. [ \Delta NW=-0.6005 \times 600 \times \frac{-0.02}{1.08} ] [ \Delta NW=+6.6722\text{ million} ]

Net worth increases by Rs. 6.6722 million.
New net worth $=50+6.6722=Rs.\ 56.6722$ million.