The document discusses capital adequacy ratio (CAR) requirements for commercial banks in Nepal. It defines CAR as the ratio of a bank's capital to its risk weighted assets. It then provides CAR data for the top 10 commercial banks in Nepal from fiscal years 2069/70 to 2073/74, showing averages between 8-16% across banks. Lending rates for these banks over the same period are also presented, ranging between 6-10% on average. The conclusion discusses how banks may raise lending rates to maintain sufficient CAR levels if their ratio is too low.
2. Capital Adequacy Ratio
Capital adequacy ratio is a ratio which is designed by bank
which calculates the capital and the risk exposures and it
analysis (Mishkin & Eakins, 2006)
CAR=
Tier One Capital + Tier Two capital
Risk Weighted Assets
๏ Tier one capital = (Core + additional tier 1
capital )
๏ This means the core measure of a bankโs
financial strength from a regulator's point of
view which is composed of core capital.
(Basel Theory)
๏ Tier Two capital = this is supplementary
capital
๏ Risk Weighted Assets = this is credit
risk exposures (RWE), market risk,
operational risk, and supervisory adjustment
(Calem & Rob, 1999)
4. For Foreign Banks
๏ Clause no 5 of Policy for foreign banks: The assigned capital must be
20Million US in minimum to operate branch office in Nepal by foreign
bank. Capital must be increased in the capital level of existing domestic
and joint venture banks increases. (Nepal Rastra Bank, 2017)
๏ Clause no. 6, that the cash amount equivalent to rest 95% must either be
deposited in the designated account of Nepal Rastra Bank or the bank
guarantee must be produced within thirty days which is done for the
safety and proper regulation of depositor. (Nepal Rastra Bank, 2017)
๏ Foreign bank or financial institution may carry on wholesale banking
transaction relating to deposit, loan, credit, other service and facilities
through the branch office in Nepal
NRB Clause
6. S.NO. Commercial Banks CAR
1 Standard Chartered Bank 22.04
2 Civil Bank 19.64
3 Kumari Bank 16.15
4 Nepal Bangladesh Bank 15.75
5 Nepal Bank 15.61
6 Mega Bank 14.9
7 Everest Bank 14.85
8 Nepal Investment Bank 14.48
9 NIC Asia 14
10 Nabil Bank 12.95
CAR of Commercial Banks
7. S.NO. Commercial Banks 2073/74 2072/73 2071/72 2070/71 2069/70 Total Average
1 Standard Chartered Bank 22.04 15.82 13.86 14.3 14.48 80.5 16.1
2 Civil Bank 19.64 12.53 13.39 14.92 15.41 75.89 15.2
3 Kumari Bank 16.15 12.02 11.12 11.92 12.23 6344 12.7
4 Nepal Bangladesh Bank 15.75 11.05 11.36 12.2 12.09 62.45 12.5
5 Nepal Bank 15.61 11.41 7.8 5.26 0.04 40.12 8.02
6 Mega Bank 14.9 12.95 14.99 16.16 19.53 78.5 15.7
7 Everest Bank 14.85 12.79 13.32 12.89 13.21 67.06 13.4
8 Nepal Investment Bank 14.48 16.19 11.99 12.71 55.37 11.1
9 NIC Asia 14 12.66 13.16 14.89 14.18 68.84 13.8
10 Nabil Bank 12.95 12.65 11.91 13.23 13.29 64.03 12.8
CAR of 5 Fiscal Years
8. S. No. Commercial Banks 2073/74 2072/73 2071/72 2070/71 2069/70 Total Average
1 Standard Chartered Bank 8.07 6 7.01 8.99 6.448 36.55 7.31
2 Civil Bank 9.49 8.8 10.25 10.54 11.5 50.58 10.1
3 Kumari Bank 9.19 8 8.17 9.42 10.82 45.6 9.12
4 Nepal Bangladesh Bank 9.88 9.76 10.18 10.67 10.4 50.89 10.2
5 Nepal Bank 8.96 7.95 6.78 8.91 7.98 40.58 8.12
6 Mega Bank 9.85 8.34 7.87 9.27 10.21 45.54 9.11
7 Everest Bank 4.48 4.89 4.76 9.25 10.21 33.59 6.72
8 Nepal Investment Bank 9.73 7.21 8.09 9.32 34.35 6.87
9 NIC Asia 12.4 7.77 8.31 10.45 10.69 49.57 9.91
10 Nabil Bank 6.58 5.83 6.89 8.67 9.58 3755 7.51
Lending Rate 5 Fiscal Years
9. Average of Lending rate and CAR
S.NO. Commercial Banks Average of Lending Rates Average of CAR
1 Standard Chartered Bank 7.31 16.1
2 Civil Bank 10.1 15.2
3 Kumari Bank 9.12 12.7
4 Nepal Bangladesh Bank 10.2 12.5
5 Nepal Bank 8.12 8.02
6 Mega Bank 9.11 15.7
7 Everest Bank 6.72 13.4
8 Nepal Investment Bank 6.87 11.1
9 NIC Asia 9.91 13.8
10 Nabil Bank 7.51 12.8
Lending Rate & CAR
10. Conclusion
๏ If a bank faces capital adequacy ratio requirement then bank
raises the lending rate relative to the deposit rate when actual
ratio is too low.
๏ Once there was the case of low capital adequacy ratio for NB
Bank which was settled by mid- July of 2016.
๏ TO maintain CAR, NB bank had to issue either right shares or
bonds to shareholders and to the general public.
(Sharesansar, 2016)
๏ If a bank faces capital adequacy ratio requirement then bank
raises the lending rate relative to the deposit rate when actual
ratio is too low.
11. References:
๏ Calem, P., & Rob, R. (1999). The impact of capital-
based regulation on bank risk-taking. Journal of
Financial Intermediation, 317-352.
๏ El-Ansary, O. A., & Hafez, H. M. (2015). Determinants
of Capital Adequacy Ratio: An Empirical Study on
Egyptian Banks. Corporate Ownership and Control.
๏ Kantipur. (2014, September 9). Grand Bank grounded
after capital adequacy plunges. Money, pp.
http://kathmandupost.ekantipur.com/news/2014-09-
09/grand-bank-grounded-after-capital-adequacy-
plunges.html.
12. References:
๏ Mishkin, F. S., & Eakins, S. G. (2006). Financial markets and
institutions. Pearson Education.
๏ Nepal Rastra Bank. (2017). Policies- Licensing policy for foreign
banks branch. Retrieved August 18, 2017, from Nepal Rastra
Bank - Central Bank of Nepal:
https://nrb.org.np/ofg/other_policy/Policies--
Licensing_Policy_for_Foreign_Banks_Branch%20(English).pdf
๏ Sharesansar. (2016, May 7). Nepal Bangladesh Bank likely to
issue Right shares to maintain NRB mandatory Capital Adequacy
Ratio & Paid up capital. Retrieved August 20, 2017, from
Sharesansar.com: http://www.sharesansar.com/c/nepal-
bangladesh-bank-likely-to-issue-right-shares-to-maintain-nrb-
mandatory-capital-adequacy-ratio-paid-up-capital.html
Editor's Notes
To understand the capital structure of banks, we also have to understand the policy for foreign banks. For instance, Standard Chartered Bank as per Clause no 5 of Policy for foreign banks: The assigned capital must be 20Million US in minimum to operate branch office in Nepal by foreign bank.
The CAR ratio of Standard Chartered Bank is high of 22.04 while the lowest is of Nabil Bank and 4 banks are hovering in 14 ranges.
In the above table with the highest CAR of Standard Chartered, it has comparatively lower lending rate, which is 7.31 and this bank is more secure while for the case of NIC Asia, the CAR is 13.8 while the lending rate is 9.91 and is the highest in such case, there can be higher risk. NIC Asia is providing 7-9% in saving account to attract depositors while 8-9.5% on fixed account this is to increase capital and the loan rate is up to 5% because it has simultaneously reached the level of liquidity sufficiency because of the offers they have implemented.