2. Commercial Banks: Services Provided by Banks
1. Individual banking
• Banking service provided to individual
• Accepting deposits, consumer lending, residential mortgage
lending, consumer installment loans, credit card financing,
automobile loans, brokerage services, students loans,
individual oriented financial services etc.
• Issues guarantee, remittance, receive and make payment on
behalf of the customers, arranging safe deposit vaults etc.
3. Commercial Banks: Services Provided by Banks
2. Institutional banking
• Banking service provided to institutions and organizations.
• Commercial real estate financing, lease financing, factoring
services, providing custodial services, cash management
services like accounting maintenance, cheque clearing and
electronic transfer of the funds.
• Co-financing, merchant banking service, issue guarantee,
overdraft etc.
4. Commercial Banks: Services Provided by Banks
3. Global banking
• Banking services that include corporate financing,
capital markets and foreign exchange products and
services.
• Acts as dealer of foreign government securities, make
bye and sale of securities in the international capital
markets.
5. Bank funding
• Refers to the sources of funds for a bank. They are:
1.Deposits
Demand deposits; deposits which are withdrawn on
demand, E.g. current account in Nepal, pays no interest,
charge service fee directly or indirectly from institution,
ask for minimum balance.
6. Bank funding
Saving deposits; deposits which are withdrawn on
demand but with the limit of withdrawals, bank pays
interest, not allowed for institutions.
Time deposits; deposits that have fixed maturity period
and banks restrict the depositors to withdraw the cash
before their maturity period, depositors may get loan,
depositors may withdraw prior to maturity but should
pay bank the penalty.
7. Bank funding
2. Borrowing from central bank
• May take loan from central bank at discount rate to meet
short term liquidity not to make profit.
3. Other non-deposit borrowing; bond and debentures,
money market instruments.
4. Common stock; IPO, right shares, bonus shares.
8. Capital Requirements for Banks
• Total capital of the bank is the sum of the Tier I capital(
core capital) and Tier II capital(supplementary capital).
• To evaluate the capital adequacy of a bank, core capital
is measured.
• Core capital and supplementary capital include: (Next
slides)
11. Calculation of total capital fund
Total capital= Core capital + Supplementary capital
12. Total Risk Weighted Exposure
• Total risk weighted exposure is the sum total of credit
risk weighted exposure+ Operational risk weighted
exposure + Market risk weighted exposure +
supplementary adjustment under Pillar II
13. 1.Credit Risk Weighted Exposure
• Nepal Rastra Bank(NRB) has classified assets into different
risk classes and assigned weight to each class.
• The risk weight assigned are 0%, 20%, 50%, 60%, 75%, 100%,
150% and 200%.
• Credit risk weighted asset is the sum of the book value of
assets multiplied by risk weight assigned to the respective
assets.
15. 2.Operational Risk Weighted Exposure
• The possibility of increase in the operating cost and decrease in
the operating profit due to internal and external causes is called
operational risk weighted exposure.
• NRB has fixed 15% rate for ORWE.
16. 3. Market Risk Weighted Exposure
• The effect on income due to unfavourable economy and weak
financial market is called market risk weighted exposure.
• NRB has fixed 5% rate for MRWE.
17. 4. Supervisory Adjustment
• NRB supervises and monitors the activities of commercial
banks. If the commercial banks do not obey the rules imposed
by NRB, NRB directs to increase the weighted risk. This is
called supervisory adjustment under Pillar II.
18. Core Capital and Capital Adequacy Ratio
1. Core Capital Ratio= Core Capital x 100
Total Risk Weighted Exposure
( Note: NRB has fixed 4% minimum)
2. Capital Adequacy Ratio= Total Capital Fund x 100
Total Risk Weighted Exposure
( Note: NRB has fixed 8.5% minimum)
3. Minimum Core Capital = Total Risk Weighted Asset x
Minimum Ratio
19. P- 3.5 solution (c) only
3.5(c) According to the minimum core capital requirement, the
bank should have Rs. 2,100 million of minimum core capital.
However, it has Rs. 2,500 in core capital, which is higher than
the minimum requirement. So, the bank has maintained its
minimum core capital requirement.
20. P- 3.6 solution (c) only
3.6(c) Capital adequacy ratio of bank is 12.31% and it has
maintained capital fund of Rs. 2,400 million. As per the
requirement of the central bank, it has to maintain 10% of the
total risk weighted exposure and it comes around Rs. 1,950
million. So the bank has more capital than what it is supposed to
have.
3.7(e) same interpretation.
21. P- 3.10 solution
a. Calculation of core capital
Paid up capital 2,000
Share premium 100
General reserve 50
Capital redemption fund 100
Capital adjustment fund 200
Retained earnings 100
Total 2550
Less: Goodwill 50
Less: Fictitious assets 20
Core capital 2,480
22. P- 3.10 solution
b. Calculation of supplementary capital
Cumulative preference share 500
Subordinated term loan 500
General loan loss provision 200
Exchange equalization reserves 100
Investment adjustment reserve 100
Assets revaluation reserve 200
Hybrid capital instruments 200
Total supplementary capital 1,800
23. P- 3.10 solution
c. Calculation of Total Capital
Total capital= Core capital + supplementary capital
Or, Total capital= 2,480+ 1,800
Or, Total capital= Rs. 4,280
24. P- 3.10 solution
d. Calculation of on balance sheet credit risk weighted exposure
Balance sheet items BV (in millions) RW (in %) RWE
Claim on Government securities 1,400 0 0
Claims on foreign government and central bank 400 50 200
Claims on domestic companies 15,000 100 15,000
Staff loans and advances 100 60 60
Claims secured by residential properties 20,000 60 12,000
Total 27,260
25. P- 3.10 solution
e. Calculation of off- balance sheet credit risk weighted exposure
Off- Balance sheet items BV (in millions) RW (in %) RWE
L/C commitment 1,200 50 600
Bid Bond 100 50 50
Advance payment guarantee 500 100 500
Total 1,150
26. P- 3.10 solution
f. Calculation of total credit risk weighted exposure
Total credit risk weighted balance sheet exposure= 27,260
Add: Total credit risk weighted off- balance sheet assets= 1,150
Total credit risk weighted exposure = 28,410
27. P- 3.10 solution
g. Calculation of core capital(Tier I capital) ratio
Core capital ratio= (Core capital/ Total risk weighted
exposure)x100
= ( 2,480/ 28,410+2,000+ 1,200)x 100
= 7.84%
28. P- 3.10 solution
h. Calculation of capital adequacy ratio
Capital adequacy ratio= (Total capital fund/ Total risk weighted
exposure) x100
= ( 4,280/ 28,410+2,000+ 1,200)x 100
= 13.54%
29. P- 3.10 solution
i. Calculation of required minimum capital fund
Required minimum capital fund = Minimum ratio x Total risk
weighted exposure
= 0.085x 31,610
= 2,686.85 million