This thesis examines the impact of Nepal Rastra Bank's (NRB) capital adequacy norms on two commercial banks in Nepal - Bank of Kathmandu Ltd (BOK) and Himalayan Bank Ltd (HBL). The study analyzes the capital funds, risk-weighted assets, deposit trends, credit trends, capital adequacy ratios, and perceptions of depositors at both banks. Statistical tests are used to determine the relationship between capital funds and other variables after the introduction of NRB's capital adequacy directives in 2001. The results indicate that both banks increased their capital funds in response to the new norms, but that BOK still struggles to meet requirements while HBL remains one of Nepal's stronger joint-venture

1. Nepal Rastra Bank – Capital Adequacy Norms
for Commercial Banks and its impact:
Case Study of
Bank of Kathmandu Ltd and Himalayan Bank Ltd
A THESIS REPORT
By:
Manoj Dumaru Shrestha
Kathmandu, Nepal

2. Nepal Rastra Bank – Capital Adequacy Norms
for Commercial Banks and its impact:
Case Study of
Bank of Kathmandu Ltd and Himalayan Bank Ltd
By:
Manoj Dumaru Shrestha
Shanker Dev Campus
TU Registration Number: 720/93
A Thesis Submitted to:
Office of the Dean
Faculty of Management
Tribhuvan University
In partial fulfillment of the requirement of the degree of
Master of Business Studies (MBS)
Putalisadak, Kathmandu
October 2003

3. D ECLARATION
I hereby declare that the work reported in this thesis entitled “Nepal Rastra Bank –
Capital Adequacy Norms for Commercial Banks and its impact: Case Study of
Bank of Kathmandu Ltd and Himalayan Bank Ltd” submitted to Shanker Dev
Campus, Faculty of Management, Tribhuvan University is my original work done in
the form of partial fulfillment of the requirement for the Master’s Degree in
Business Studies (MBS) under the supervision of Mrs. Amuda Shrestha and Mr.
Shankar Prasad Khanal of Shanker Dev Campus.
Manoj Dumaru Shrestha
Date: TU Reg. No.: 720/93

4. A CKNOWLEDGEMENT
This thesis entitled “Nepal Rastra Bank – Capital Adequacy Norms for
Commercial Banks and its impact: Case Study of Bank of Kathmandu Ltd and
Himalayan Bank Ltd” has been prepared in partial fulfillment for the degree of
Masters of Business Studies (MBS) under the supervision of Mrs. Amuda Shrestha,
Campus Chief and Mr. Shankar Prasad Khanal, Lecturer, Shanker Dev Campus.
It is my privilege of getting helps and co-operation from different persons. It is not
possible to enumerate the names of all of them. However, it will be matter of
injustice if I forget the names of those personalities whose valuable suggestions and
co-operation escorted to complete this thesis report.
First and foremost, I would like to offer special thanks to Mrs. Amuda Shrestha and
Mr. Shankar Prasad Khanal for their proper supervision and suggestions. I would
like to thank Mr. Sushiel Joshi, Company Secretary and Deputy General Manager of
Himalayan Bank Limited and Mr. Binod N. Shrestha, Assistant Manager of Bank of
Kathmandu Ltd for their immense co-operation during the research work of this
thesis. Also, I would like to thank Mr. Gyanendra Shrestha of Himalayan Bank Ltd
and Ms. Ramila Shrestha of Bank of Kathmandu who provided relevant information
and data, which helped me in preparing this thesis report. Thanks to all of them.
I could not remain without thanking to my teachers and lecturers, especially to Dr.
Gita Pradhan, Mr. Rishi Raj Gautam, Mr. Puspa Raj Joshi and Mr. Gopal Prasad
Bhatta who all helped me during my study of MBS and during preparation of this
thesis report.
It was a novel experience of doing a thesis work which certainly helped me to gain
deep knowledge in the subject. But accomplishment of the objective was not easy.
The foremost difficulty was the scarcity of data and information, which I
experienced as the most difficult work during any type of research study in Nepal.
Nevertheless, it was a pleasant feeling to accomplish the thesis report finally.
Manoj Dumaru Shrestha
Date: TU Reg. No.: 720/93
i

5. TABLE OF C ONTENTS
Acknowledgement.......................................................................................................i
Table of Contents.......................................................................................................ii
List of Tables.............................................................................................................iv
List of Figures ............................................................................................................v
Abbreviations............................................................................................................vi
Chapter 1 Introduction .............................................................................................1
1.1 Background................................................................................................1
1.2 Focus of the Study .....................................................................................3
1.2.1 Introduction to NRB ......................................................................4
1.2.2 Introduction to BOK......................................................................6
1.2.3 Introduction to HBL ......................................................................7
1.3 Statement of Problem ................................................................................8
1.4 Objectives of the study ..............................................................................9
1.5 Significance of the study ...........................................................................9
1.6 Limitation of study ..................................................................................10
1.7 Theoretical Framework ...........................................................................11
1.8 Problem Hypothesis.................................................................................11
1.9 Structure of study report..........................................................................11
Chapter 2 Literature Review..................................................................................13
2.1 Conceptual Review..................................................................................13
2.1.1 Origin and Development of Banks ..............................................13
2.1.2 Development of Central Bank .....................................................14
2.1.3 Meaning of Central Bank ............................................................14
2.1.4 Importance & Functions of Central Banks ..................................15
2.1.5 Meaning of Commercial Banks...................................................16
2.1.6 Overview: Capital and Capital Adequacy ...................................18
2.2 Review of NRB Capital Adequacy Norms for Commercial Banks ........20
2.3 Empirical Review ....................................................................................23
2.3.1 Review of Articles and Reports...................................................23
2.3.2 Review of Thesis Works .............................................................27
Chapter 3 Research Methodology..........................................................................32
3.1 Research Design ......................................................................................32
3.2 Population and Sample ............................................................................32
3.3 Data collection procedure........................................................................33
3.4 Data Analysis Tools ................................................................................33
3.4.1 Financial Tools ............................................................................33
3.4.2 Statistical Tools ...........................................................................35
ii

6. Chapter 4 Data Presentation and Analysis ...........................................................37
4.1 Presentation of Data ................................................................................37
4.1.1 Capital Fund ................................................................................37
4.1.1.1 Capital Fund of BOK............................................................... 38
4.1.1.2 Capital Fund of HBL ............................................................... 40
4.1.2 Risk-Weighted Assets of BOK and HBL ....................................42
4.1.3 Deposit Trend of BOK and HBL.................................................42
4.1.4 Credit Trend of BOK and HBL ...................................................45
4.2 Ratio Analysis .........................................................................................47
4.2.1 Capital Adequacy Ratios of BOK and HBL................................47
4.2.2 Capital to Deposit Ratios of BOK and HBL ...............................48
4.2.3 Credit / Deposit Ratios of BOK and HBL...................................49
4.3 Statistical Analysis ..................................................................................50
4.3.1 Correlation co-efficient ...............................................................50
4.3.2 Test of Hypothesis.......................................................................51
4.4 Impact of Capital Adequacy Norms on BOK and HBL..........................53
4.4.1 Study of Changes in Capital Fund of BOK and HBL .................53
4.4.2 Study of Changes in Share Capital of BOK and HBL ................54
4.4.3 Study of Response of Officials of BOK and HBL ......................55
4.5 Study of Perception of Depositors on Commercial Banks......................55
Chapter 5 Summary, Findings, Conclusion & Recommendation ..............................57
5.1 Summary..................................................................................................57
5.2 Findings ...................................................................................................58
5.3 Conclusion ...............................................................................................60
5.4 Recommendation .....................................................................................61
Bibliography.............................................................................................................63
Appendices ...............................................................................................................67
Bio Data ....................................................................................................................89
iii

7. L IST OF TABLES
Table 4.1 Capital Fund of BOK ................................................................................38
Table 4.2 Capital Fund of HBL.................................................................................40
Table 4.3 Risk Weighted Assets of BOK & HBL.....................................................42
Table 4.4 Deposit Collection Trend of BOK, HBL and National Total....................43
Table 4.5 Credit Trend of BOK, HBL and National Total........................................45
Table 4.6 Capital Adequacy Ratios of BOK & HBL ................................................47
Table 4.7 Capital to Deposit Ratios of BOK & HBL................................................48
Table 4.8 Credit/Deposit Ratios of BOK & HBL .....................................................49
Table 4.9 Correlation coefficients .............................................................................50
Table 4.10 Hypothesis 1 ............................................................................................51
Table 4.11 Hypothesis 2 ............................................................................................51
Table 4.12 Hypothesis 3 ............................................................................................52
Table 4.13 Hypothesis 4 ............................................................................................52
Table 4.15 Changes in Capital Fund of BOK and HBL............................................53
Table 4.16 Changes in Share Capital of BOK and HBL...........................................54
iv

8. L IST OF F IGURES
Figure 4.1 Trend of Capital Fund of BOK ................................................................39
Figure 4.2 Trend of Capital Fund of HBL.................................................................41
Figure 4.3 Share of BOK & HBL on Total National Deposit Collections...............44
Figure 4.4 Share of BOK & HBL on Total National Credit ....................................46
v

9. A BBREVIATIONS
BOK Bank of Kathmandu Limited
FY Fiscal Year
HBL Himalayan Bank Limited
HMG/N His Majesty’s Government of Nepal
NBBL Nepal Bangladesh Bank Limited
NGBL Nepal Grindlays Bank Limited (now SCBNL)
NIBL Nepal Investment Bank Ltd (formerly Nepal Indosuez Bank Ltd)
NPA Non Performing Assets
NRB Nepal Rastra Bank
PSA Premium Savings Account
SCBNL Standard Chartered Bank Nepal Limited
TRWA Total Risk Weighted Assets
vi

10. C HAPTER 1
I NTRODUCTION
1.1 Background
Nepal, which is surrounded by China to the north and India to the east, west and
south, is one of the least developed countries in the world which is directing her
efforts in accelerating the pace of her economic development. Being landlocked
happens to be a disadvantage for the country. Nepal is located in between the
latitude 26°22’ North to 30°27’ North and longitude 80°4’ East to 88°12’ East. The
average length being 885 km. east to west and average breadth is about 193 km.
north to south and area is 147,181 sq. km.
The economy of Nepal is survived by agricultural sector. The agriculture sector
contributes over 60 percent to the GDP of the country. Over 80% of the population
is dependent on the agriculture. Therefore, major concentration of every government
of Nepal has been the development and advancement of agriculture sector. But, still
there has always been scarcity of finance in this sector. To some extent, the
establishment of Agriculture Development Bank has provided the support for the
farmers to raise the required capital. Also, various programs like microfinance
programs, cooperative programs have been introduced in various villages of Nepal
which has definitely helped local people to finance them.
While talking about the capital formation, commercial banks play a major role on it.
Capital is one of the most important components for an organization. Actually, no
organization can exist without capital. Without capital it is not possible to set up any
type of business whether it is a general store or a big business house. Every

11. 2
organization is started with a zero position and only come into existence when the
promoters, owners or shareholders finance on it as capital. Every organization
should have enough capital to run business.
Although the banks are the major source of capital, they also have to raise capital to
run business. Especially, the bank capital has significant role to play as the banks
have obligations to mass people, its depositors. Thus, the banks should hold an
adequate capital to secure the interest of depositors.
Capital adequacy has become one of the most significant factors for assessing the
soundness of banking sector. Raise and utilization of funds are the primary functions
of commercial banks. As such, commercial banks collect a large amount of deposits
from general public. The depositors think that depositing their money in a bank is
safe and relaxing. But, what does happen if the bank does not have enough capital
funds to provide a buffer against future, unexpected losses? Therefore, capital must
be sufficient to protect a bank’s depositors and counterparties from the risks like,
credit and market risks. Otherwise the banks will use all the money of depositors in
their own interest and depositors will have to suffer loss.
After the restoration of multiparty democracy, several commercial banks make a
way to the business in Nepal. At present, commercial banks hold a large share of
economic activities of the country. Stock market has been dominated by commercial
banks since a decade. Everyday we can see trading of large amount of stock
transactions of commercial banks. Not only in the stock market, but commercial
banks have also been major contributors to the revenue of the country. They have
been paying a large amount of tax every year. Banking sector has become a
mainstay of the economy of the country.
Establishment of commercial banks is governed by Commercial Bank Act, 2031 BS
and Company Act, 2053 BS. However, Nepal Rastra Bank (NRB), as a regulatory
body for banks and financial institutions, has right to specify the capital
requirements, and other requirements. Being the central bank of Nepal, NRB has the
responsibility to give special attention to the interest of depositors. It is to be noted

12. 3
that as per the banking and financial statistics of NRB, the commercial banks of
Nepal have collected more than Rs. 185 billion money from depositors by the end of
fiscal year 2001/02. Such a big amount of money should have to be secured and
NRB has the major responsibility to protect it.
In March 2001 NRB issued various directives to be complied by all commercial
banks of the country. The directives consist of nine volumes. The NRB directive no.
1 includes the capital adequacy norms for commercial banks indicating the
requirement of maintaining capital fund to the prescribed ratios. The directives are
said to be based on the internationally accepted norms of Basel Committee. The
Basel Committee on Banking Supervision is a committee of banking supervisory
authorities which was established by the central bank Governors of the Group of Ten
countries in 1975. It consists of senior representatives of bank supervisory
authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan,
Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom and the
United States. It usually meets at the Bank for International Settlements in Basel,
Switzerland, where its permanent Secretariat is located. The Basel Committee issued
Basel Capital Accord in 1988. The Basel Capital Accord was implemented
worldwide by 1992 which is presently in practice. This Basel Accord is going to be
replaced by a new Basel Capital Accord by 2006.
1.2 Focus of the Study
The study is based on the capital funds of the banks which is supposed to be
adequate as per the NRB directive no. 1, which is related with the capital adequacy
norms for commercial banks. The norms basically emphasize on the basic
requirement of the capital fund that a commercial bank should possess. The
fundamental objective of the norms is to safeguard the interest of the depositors As
per these norms, bank capital has been divided into two categories which are
generally known as Tier-1 and Tier-2.

13. 4
At present, there are total 16 commercial banks in Nepal. The capital fund and
deposit collection up to the end of fiscal year 2001/02 are shown in Appendix I.
Keeping in the view of the striving commercial banks, the thesis report, as case
study, analyzes the matters, issues and problems related to capital funds of Bank of
Kathmandu Ltd (BOK) which is struggling to incline and Himalayan Bank Ltd
(HBL) which is believed to be one of the strong joint-venture banks of the country.
The thesis report is mainly focused on accordance of the capital adequacy norms of
Nepal Rastra Bank (NRB) by these commercial banks.
1.2.1 Introduction to NRB
Nepal Rastra Bank is the central bank of Nepal. NRB was established in 1955 under
the Nepal Rastra Bank Act, 2012 BS. Now, NRB is running under a new act – Nepal
Rastra Bank Act, 2058 BS. Before 1955, the functions of a central bank were
performed by the government itself.
NRB is the only authority to issue Nepalese Rupees currency. It has right to fix
exchange rates with other convertible currencies. However, the exchange rates are
extremely depended upon the Indian currency.
Being the central bank of the country, the ownership of NRB is with HMG/N. But,
the management of NRB is not controlled by HMG/N. NRB has 12 branches
throughout the Kingdom of Nepal including the Head Office at Baluwatar and the
Main Banking Office at Thapathali in Kathmandu.
NRB has been established as the regulatory body for banks and financial institutions
of Nepal. So, it has right to constitute rules and regulations to be followed by banks
and financial institutions in the country. All the banks and financial institutions
operate under the regulations of NRB. The establishment of such institutions is also
in discretion of NRB. To regulate the operations of commercial banks, NRB has
issued various directives which include capital adequacy norms to be followed by
commercial banks.

14. 5
As per the Nepal Rastra Bank Act, 2058 BS the objectives of NRB are stated as
follows:
a) To formulate and maintain appropriate monetary and foreign exchange policy for
stable price and balance of payments situation required for sustainable economic
development;
b) To manage the required liquidity and stability of banking and financial sectors;
c) To develop secure, healthy, and efficient payment system;
d) To monitor, supervise and evaluate banking and financial system; and
e) To enhance trust of citizens in overall banking and financial system within the
country.
As well as, Nepal Rastra Bank Act, 2058 BS has prescribed the rights, duties and
functions of NRB as follows:
a) To issue currency notes and coins in the market;
b) To formulate and implement necessary monetary policy for price stability;
c) To formulate and implement foreign exchange policy;
d) To determine the foreign exchange rate adjustment regime;
e) To operate and manage foreign exchange reserves;
f) To issue license to commercial banks and financial companies for carrying out
financial transactions and regulate, inspect, supervise and monitor such
transactions;
g) To function as the banker, advisor and fiscal agent of His Majesty’s
Government;
h) To function as a bank of commercial banks and financial institutions, and as a
lender of last resort;
i) To establish, promote and regulate the systems of payments, clearing and
settlements; and
j) To carry out other important functions as necessary towards realizing the
objectives enjoined by the Act.

15. 6
1.2.2 Introduction to BOK
Bank of Kathmandu Ltd was established in March 1995 with an authorized capital
of Rs. 240 million. The bank was established in collaboration with The Siam
Commercial Bank Public Company Ltd of Thailand. But The Siam Commercial
Bank Public Company Ltd has sold all its shares to local promoters. BOK was
established with the predominant objectives of Identifying business prospects not yet
catered by then existing commercial banks and offer new banking products and
services and Introducing modern banking technology facilitating bank and business
operations and transactions.
The head office of BOK is located at Kamaladi in Kathmandu. It has branch network
of total seven branches including Head Office at Kamaladi; two branches inside
Kathmandu Valley: New Road Branch and Thamel Branch and four outside
Kathmandu Valley: Butwal Branch, Dhangadhi Branch, Hetauda Branch, and
Nepalgunj Branch.
BOK is committed to providing products and services of the highest standards to its
customers by understanding their requirements best suiting the market needs. In
pursuit to deliver the products and services of the highest standards, BOK has state-
of-the-art technology for appropriate and efficient Management Information System
(MIS) and rendering quality services, VSAT and Radio Modem for networking,
SWIFT for international trade and transfer of funds around the world, correspondent
banking relationships with over 200 banks worldwide for effective and proficient
execution of international trade and remittance activities, gamut of corporate and
retail banking products and services and centralized banking operations for better
risk management, consistent service deliveries and lowering operating cost.
The present share capital and ownership is shown in Appendix I. At present, BOK
has an authorized capital of Rs. 1,000 million and issued capital of Rs. 500 million.
Its paid-up capital stands at Rs. 463.58 million. Mr. Radhesh Pant is leading the
management of the bank in the capacity of Managing Director.

16. 7
1.2.3 Introduction to HBL
Himalayan Bank Ltd is the first joint-venture commercial bank to be established
after the restoration of multiparty democracy in the country. It was established in
January 1993 with an authorized capital of Rs. 240 million. HBL was established
with the joint-venture of Pakistan based bank – Habib Bank Ltd.
The head office of HBL is at Karmachari Sanchayakosh Building, Tridevi Marg,
Thamel. HBL has four other branches in Kathmandu Valley: New Road Branch,
Maharajgunj Branch, Patan Branch, and Nagarkot Branch. It has seven branches
outside Kathmandu Valley: Bharatpur Branch, Tandi Branch, Birgunj Branch,
Biratnagar Branch, Hetauda Branch, Bhairahawa Branch, and Banepa Branch.
Besides, HBL has a separate Credit Card Center at Hariharbhawan, Pulchowk,
Lalitpur at the premises of Patan Branch.
The policy of HBL is to extend quality and personalized service to its customers as
promptly as possible. To extend more efficient services to its customers, HBL has
been adopting innovative and latest banking technologies like, state-of-the-art
technology and modern banking tools. HBL has access to the worldwide
correspondent network of Habib Bank Limited for funds transfer, letters of credit
and any banking business anywhere in the world. Besides, HBL also has
correspondent arrangements with 178 internationally renowned banks like American
Express Bank, Citibank and ABN Amro.
The present share capital and ownership is shown in Appendix II. At the end of
fiscal year 2001/02, HBL has an authorized capital of Rs. 1,000 million and issued
capital of Rs. 650 million. Its paid-up capital stands at Rs. 390 million. Recently to
fulfill is supplementary capital requirement, HBL issued short-term unsecured
subordinated bonds: HBL Bond 2066 having face value of Rs. 1,000 and coupon
interest of 8.5%. The units issued were 360 thousand totaling the amount at Rs. 360
million. Mr. Shahid M. Loan, an expatriate from Pakistan, is leading the
management as Senior General Manager.

17. 8
1.3 Statement of Problem
Banking and financial statistics (2002) shows that, there are more than Rs. 185
billion of amount deposited in various banks of the country by the end of fiscal year
2000/2001. But if the banks go bankrupted, what will happen to the depositors of
such money? Thus, an adequate capital fund is required to safeguard the money of
depositors.
Bhandari (2003) points out that adequacy and inadequacy of bank capital directly
affects the banking transaction. The adequacy of bank capital is the most important
aspect of a bank. The bank should pay attention to many things for the adequacy of
capital.
In March 2001, NRB issued a new set of directives to commercial banks consisting
of nine parts. NRB claims that these directives are based on the internationally
accepted banking norms of Basel Committee. Out of nine directives, the directive
no. 1, which was later revised in September 2001, is related with the requirement of
the maintenance of capital fund by commercial banks.
The capital adequacy ratio is derived on the basis of total risk weighted assets
(TRWA). Earlier, the capital adequacy ratio was prescribed as 8% of TRWA. The
directive no. 1 which is related to capital fund has revised the capital adequacy ratio
to be maintained by commercial banks as follows:
Time Table Core Capital Total Capital Fund
For FY 2058/59 4.5 % 9.0 %
For FY 2059/60 5.0 % 10.0 %
From FY 2060/61 onwards 6.0 % 12.0 %
As well as, NRB has set up to increase the paid up share capital of national level
commercial banks to Rs. 1 billion by the year 2009.

18. 9
Now, question arises, why these changes are required? While revising the capital
adequacy norms, none of the existing commercial banks meet the standard.
However, they are allowed to comply with the norms, stage by stage within the
specific period.
In the fiscal year 2057/58, BOK had a capital adequacy ratio of 8.6% and HBL had
the same ratio of 8.01%. Whilst, they are able to maintain an adequate ratio in the
fiscal year 2058/59 which is more than 9% as required by NRB Capital Adequacy
Norms. For this compliance, they had to take various measures. Hence, the thesis
will mainly focus on the capital fund of these two commercial banks.
1.4 Objectives of the study
The main objectives of the study are as follows:
To analyze the significance and impact of NRB capital adequacy norms on
commercial banks;
To examine the capital adequacy of Bank of Kathmandu and Himalayan Bank
Ltd;
To examine the relation of capital fund to the other stakes of bank
To analyze the steps taken by commercial banks to fulfill the requirements as per
these norms; and
To make necessary suggestions and recommendations
1.5 Significance of the study
The study will have a significant importance in the present context of banking
business in Nepal. Commercial banks have collected more than Rs. 185 million of
deposits. We can observe that there is a lack of investment opportunity of fund. In
such a situation, these deposits have to be protected by adequate capital fund of
respective commercial banks. In fact, the banks should have adequate capital fund
although there are plenty of investment opportunities.

19. 10
Presently, raising capital is a tough task. The growing NPAs, being the main
headache of commercial banks, meeting the capital adequacy is very tough, though
it is not impossible.
It has been observed that any study has not been undertaken regarding the capital
adequacy norms for commercial bank. However, studies on NRB directives have
been undertaken by Pandey (2002), an MBS student of TU and Karmacharya
(2002), an MBA student of TU. In both studies, in course of study come the studies
of capital adequacy.
So, this thesis is a new study in the field of banking sector. Thus, the thesis has of
course presented some results which will reflect the capital structure and position of
commercial banks of Nepal.
1.6 Limitation of study
The study is limited of the capital fund and capital adequacy norms for commercial
banks. Since, it is not possible to take all commercial banks as sample, the thesis
will analyze on the data and information of BOK and HBL. The data and
information over the period of five fiscal years commencing from the FY 1997/98
till the FY 2001/02 are used in the study. For the analysis of capital fund, only two
years’ data are available, i.e., of FY 2000/01 and FY 2001/02.
Balance sheets, profit & loss accounts and other financial statements are considered
as basic source of data. Thus, the study is mainly based on the secondary data
collected from various sources. However, some primary data has also been derived
from the analysis of questionnaire prepared for the research study.
For the literature review various newspapers, journals, unpublished thesis works and
nevertheless the internet have been referred. However, the literature review has been
limited to very few articles and research works due to unavailability of sufficient
such matters even after very hard quest.

20. 11
1.7 Theoretical Framework
The primary and independent variable that has been considered in this research
study is capital fund of the selected commercials banks. The variables which are
supposed to be dependent are deposit and credit of these banks.
While going through the literature review, it is found that capital and deposit are
related. As well as capital and credit are related. The significance of the relationship
is tested in the analytical chapter i.e., Chapter 4. The positive correlations are
expected in both relations. The higher the capital fund, the higher the chance of
collecting more deposits and flowing more credit as well.
1.8 Problem Hypothesis
From the theoretical framework discussed earlier, the following hypotheses have
been developed which have been thoroughly tested in the Chapter 4.
1. The capital fund and deposits are correlated.
2. The capital fund and credits are correlated.
1.9 Structure of study report
The structure of the thesis report comprises a total of five chapters which have been
briefly described as follows:
Chapter 1: Introduction
To start the thesis report, this chapter includes the background of the study,
meaning, functions and importance of a central bank, introduction to NRB,
introduction to BOK, introduction to HBL, statement of problem, objective of the
study, significance of the study, limitation of the study, theoretical framework, and
problem hypothesis. This chapter has been targeted to help the reader to understand
get the rhythm of the subject matter of the thesis report.

21. 12
Chapter 2: Review of Literature
This chapter includes conceptual review, review of NRB capital adequacy norms,
and review of empirical works. For this purpose, various books, journals and
periodicals as well as internet have been utilized.
Chapter 3: Research Methodology
Research design, sample selection, sources of data, data collection procedure, tools
for analysis of the study, and limitations of the methodology have been included in
this chapter.
Chapter 4: Presentation and Analysis of Data
This chapter illustrates the collected data into a systematic format. The analysis of
these data is also included in this chapter. As well as, interpretation of analysis has
also been done in this chapter.
Chapter 5: Summary, Conclusions and Recommendations
In this chapter, the summary of the entire thesis has been comprised. This chapter
further describes the major findings of the thesis. Conclusions of the study have also
been included in this chapter. As well as, possible and viable recommendations has
also been presented in this chapter.

22. C HAPTER 2
L ITERATURE R EVIEW
2.1 Conceptual Review
2.1.1 Origin and Development of Banks
The economic activities existed in every civilization of mankind in all over the
world. But the modern banking practice was originated from Europe. The first bank
called ‘Bank of Venice’ was established in Venice in 1157. Then ‘Bank of
Barcelona’ was established in 1401 and in 1407 ‘Bank of Genoa’ was established. In
1694, the ‘Bank of England’ was established as a joint stock bank.
Nepal has a long history of using of money. History unveils that the first Nepali
coins to be introduced were Manank during the reign of the King Mandev and
Gunank during the reign of the King Gunakamdev. Afterwards the coins were
reintroduced during the reign of Amshuverma. After the unification of Nepal, the
great King Prithivi Narayan Shah started the coin Mohar. The Taksar was
established in 1789 to issue coins scientifically. In 1876, during Rana Regime an
office named Tejarath Adda was established in Kathmandu to provide loans against
deposit of gold and silver. But the office did not have right to accept deposits.
To begin to the modern banking system, Nepal Bank Limited was established in
1937 as the first bank of the country. Nepal Bank Limited dominated the financial
sector of the country for almost 30 years without any competitor. This bank played a
major role to boost up the Nepalese economy during that period. Nepal Rastra Bank
was established in 1955 as central bank of Nepal which was very essential for

23. 14
Nepalese economy. The second commercial bank, Rastriya Banijya Bank was
established in 1965 under the Rastriya Banijya Bank Act, 2022 with full ownership
of the His Majesty’s Government.
2.1.2 Development of Central Bank
In 1894, the Bank of England was converted into the central bank of England. This
was done by establishing the Governor and the Company of the Bank of England. At
present, this bank is known as the Central Bank of England.
Shekhar & Shekhar (1998) have stated that after the World War I and the
consequent chaotic monetary conditions brought home to many countries the
imperative necessity of establishing a centralized institution capable of creating and
maintaining equilibrium in the monetary sphere.
In September 1920, an International Financial Conference was held at Brussels, which
pointed out that those countries which had not yet established a central bank and were
suffered from the World War I and the consequences should establish a central bank.
In the spring of 1922, the Genoa Conference also indicated the need of central bank.
Then after, there came a wave of establishing central banks by several countries.
2.1.3 Meaning of Central Bank
Central bank is the national institution that monitors all financial and monetary
procedures and policies. Vaidya (1997) has stated that the central bank is the apex
bank in a country that controls all monetary system and banking structure.
Rosenberg (1982) has defined the central bank as a banker’s bank and a bank
holding the main body of bank reserves of a nation and the prime reservoir of credit.
(e.g., Bank of England, Bank of France)
Clark (1999) has expressed the central bank as bank that often carries out
government economic policy, influences interest and exchange rates and monitors

24. 15
the activities of commercial and merchant banks. In this way it functions as the
government’s banker and is the lender of the last resort to the banking system.
Encyclopedia Britannica (2002) defines Central Bank as an institution that is charged
with regulating the size of a nation's money supply, the availability and cost of credit,
and the foreign-exchange value of its currency. Regulation of the availability and cost
of credit may be nonselective or may be designed to influence the distribution of
credit among competing uses. The principal objectives of a modern central bank in
carrying out these functions are to maintain monetary and credit conditions conducive
to a high level of employment and production, a reasonably stable level of domestic
prices, and an adequate level of international reserves.
Central bank is an institution which is charged with the responsibility of managing
the expansion and contraction of the volume of money in the interest of the general
public welfare. It is also a banker’s bank and holding reserves of the country and
ultimate reservoir of credit. Hence, central bank is the regulating authority for
commercial banks, and other banks and financial institutions.
2.1.4 Importance & Functions of Central Banks
It is a difficult task to put aside the importance and functions of a central bank.
Shekhar & Shekhar (1998) comments that it is difficult to lay down any hard and
fast rule regarding the functions of a central bank. The powers and the range of
functions of central banks vary from country to country.
The most important and the earliest functions to be discharged by a central bank is
that of acting as a bank of issue. As well as it is a banker’s bank. The central bank
also acts as a lender of the last resort. In case of any problems and emergency to any
of the banks operating under it, central bank comes forward to rescue them
temporarily from such problems. It also plays the role of an agent, an advisor and
banker to the Government. Central bank is a custodian of the nation’s metallic
reserves and controller of currency.

25. 16
A central bank has sole right to issue national currency notes. It controls money flow
in the market by imposing monetary policy. It issues notes after full analysis of
unemployment, inflation, economic growth, etc. of the country. Central bank is the
holder of all the Government balances. It is the holder of all the reserves of the other
banks and financial institutions in the country.
Objectives between a central bank and other commercial banks are different. The
main objective of a central bank is to assist the government to implement economic
policies without any profit motive, whereas the main objective of other banks is to
earn profit by mobilizing funds collected from the general public. As well as the
central bank plays the role of guardian and parents to other commercial banks.
As a regulatory body of all other banks and financial institutions, a central bank is
the origin of all banking policies under which all the banks are suppose to operate.
Therefore, a central bank guides and assists in operating banking system as a whole.
A central bank has full authority to interfere in the banking market i.e. to all banks in
terms of implementing its policies. It can penalize the banks in case they go out of
the central bank’s policy or the termination of the license and also can restrict their
working dimensions to a large extent.
A central bank is also important in the context to co-ordinate with different
international institutions such as International Monetary Fund (IMF) etc. It works
under the supervision and guidance of such institution to develop the monetary
system of a country.
2.1.5 Meaning of Commercial Banks
Rosenberg (1982) has stated commercial bank as an organization chartered either
by the Comptroller of the Currency and known as a national bank or chartered by the
state in which it will conduct the business of banking. A commercial bank generally
specializes in demand deposits and commercial loans.

26. 17
Clark (1999) has defined commercial bank as bank that concentrates on cash
deposit and transfer services to the general public, often to be found on the High
Street. It may be joint-venture bank or a private bank.
“Bank is an institution that deals in money and its substitutes and provides other
financial services. Banks accept deposits and make loans and derive a profit from
the difference in the interest rates paid and charged, respectively. Some banks also
have the power to create money. Commercial bank is a bank with the power to make
loans that, at least in part, eventually become new demand deposits. Because a
commercial bank is required to hold only a fraction of its deposits as reserves, it can
use some of the money on deposit to extend loans. When a borrower receives a loan,
his checking account is credited with the amount of the loan; total demand deposits
are thus increased until the loan is repaid. As a group, then, commercial banks are
able to expand or contract the money supply by creating new demand deposits.”
(Encyclopedia Britannica, 2002)
“Banking, the business of providing financial services to consumers and businesses.
The basic services a bank provides are checking accounts, which can be used like
money to make payments and purchase goods and services; savings accounts and
time deposits that can be used to save money for future use; loans that consumers
and businesses can use to purchase goods and services; and basic cash management
services such as check cashing and foreign currency exchange. Commercial banks
specialize in loans to commercial and industrial businesses. Commercial banks are
owned by private investors, called stockholders, or by companies called bank
holding companies.” (Microsoft Encarta Reference Library, 2003)
The main objectives of a commercial bank are to earn profit by collecting the fund
scattered around the general public, and mobilizing it. So, the main functions of
commercial banks happen to be collecting deposits from general public and lending
loans to various economic sectors that require financing. Commercial banks make
profit by charging a bit higher interest rate in loans than they pay to depositors. So
the main source of income of commercial banks is interest income.

27. 18
2.1.6 Overview: Capital and Capital Adequacy
“Capital is a stock of resources that may be employed in the production of goods and
services and the price paid for the use of credit or money, respectively.” (Microsoft
Encarta Reference Library, 2003)
Rosenberg (1982) has defined capital in relation with banking as a long-term debt
plus owners’ equity.
The efficient functioning of markets requires participants to have confidence in each
other's stability and ability to transact business. Capital-rules help foster this
confidence because they require each member of the financial community to have,
among other things, adequate capital. This capital must be sufficient to protect a
financial organization’s depositors and counterparties from the risks of the
institution's on-balance sheet and off-balance sheet risks. Top of the list are credit
and market risks; not surprisingly, banks are required to set aside capital to cover
these two main risks. Capital standards should be designed to allow a firm to absorb
its losses, and in the worst case, to allow a firm to wind down its business without
loss to customers, counterparties and without disrupting the orderly functioning of
financial markets.
Minimum capital fund standards are thus a vital tool to reducing systemic risk. They
also play a central role in how regulators supervise financial institutions. But capital
requirements have so far tended to be simple mechanical rules rather than
applications of sophisticated risk-adjusted models. Such capital standard is widely
known as capital adequacy.
Patheja (1994) has defined banks capital as common stock plus surplus plus
undivided profits plus reserves for contingencies and other capital reserves. In
addition since a bank’s loan-loss reserves also serves as a buffer for absorbing
losses, a broader definition of bank capital include this account.

28. 19
Verma & Malhotra (1993) has indicated that the general public is interested in the
higher profitability and safety of the funds of a bank, because the public expects the
shareholders to assume all the risks. Lower profitability of a bank fills the faith of
the prospective depositors and all their incentive for investing in the various deposit
schemes.
The Basel Committee sets a standard for all the banking norms, which will be
accepted by central banks of all big industrialist countries. Regarding the capital
funds the committee has issued the Basel Capital Accord. The first Basel Capital
Accord was issued in 1988 and was implemented by 1992. The committee has now
issued New Basel Capital Accord which will be implemented by 2006 to overcome
the drawbacks of the present capital accord. Central banks of developing and
underdeveloped countries follow these standards. NRB also follows these standards
and accordingly sets standard for commercial banks in Nepal.
According to the directive issued by NRB, the bank capital has been categorized into
two parts: core capital and supplementary capital. This categorization is also known
as Tier-1 capital for core capital and Tier-2 capital for supplementary capital.
The Tier-1 capital consists of the following components of capital:
1. Share Capital,
2. Share Premium,
3. Non-Redeemable Preference Shares,
4. General Reserve Fund,
5. Cumulative Profit/Loss (up to previous FY), and
6. Current Year Profit/Loss (as per Balance Sheet).
The Tier-2 capital consists of the following components:
1. Loan Loss Provision,
2. Exchange Equalization Reserve,
3. Assets Revaluation Reserve,
4. Hybrid Capital Instruments,

29. 20
5. Unsecured Subordinated Term Debt,
6. Interest Rate Fluctuation Fund, and
7. Other Free Reserves.
The total of Tier-1 and Tier-2 capital is considered for calculating capital adequacy
ratio. The capital adequacy ratio is based on total risk-weighted assets.
Clark (1999) has defined capital adequacy as legal requirement that a financial
institution (such as a bank) should have enough capital to meet all its obligations and
fund the services it offers.
Besis (1998) has claimed that capital adequacy aims at setting minimum level of
capital as a function of risks. Thus capital should be risk based.
Maisel (1981) “Capital is adequate either when it reduces the chances of future
insolvency of an institution to some predetermine level of alternately when the
premium paid by the banks to an insurer is ‘fair’, that is, when it fully covers the
risks borne by the insurer. Such risks, in turn, depend upon the risk in the portfolio
selected by the bank, on its capital and on terms of the insurance w.r.t. when
insolvency will be determined and what loss will be paid”.
The capital adequacy ratio is yielded by the following formula:
Total Capital Fund
Capital Adequacy Ratio =
Total risk-weighted assets
× 100%
2.2 Review of NRB Capital Adequacy Norms for Commercial
Banks
With an objective to develop a healthy, competent and secured banking system for
economic prosperity of the country and to safeguard the interest of depositors, NRB
issued the directive no. 1 regarding minimum capital fund to be maintained by
commercial banks. NRB issued these capital adequacy norms by using the power

30. 21
given by Commercial Bank Act, 2031 (with amendments) Clause 14(Ka). These
norms were issued under the Nepal Rastra Bank Act, 2012 (with amendments)
Clause 23 Sub-clause 1 – Provision for developing and regulating banking system.
The norms have prescribed the minimum capital fund requirement, on the basis of
the risk-weighted assets. The banks are required to maintain the prescribed
proportion of minimum capital fund on the basis of weighted risk assets as per the
following time-table:
Time Table Core Capital Total Capital Fund
For FY 2058/59 (2001/02) 4.5% 9.0%
For FY 2059/60 (2002/03) 5.0% 10.0%
From FY 2060/61 (2003/04) onwards 6.0% 12.0%
As stated earlier, for the purpose of calculation of Capital Fund, the capital of the
banks is divided into two components Core Capital and Supplementary Capital.
Core capital which is widely known as Tier-1 capital consists of share capital, share
premium, non-redeemable preference shares, general reserve fund and accumulated
profit/loss. Supplementary capital, which is also known as Tier-2 capital consists of
loan loss provision, exchange equalization reserve, assets revaluation reserve, hybrid
capital instruments, unsecured subordinated term debt, interest rate fluctuation fund,
and other free reserves. The sum of these two components is considered to be total
capital fund.
For the purpose of calculation of capital fund, the risk-weighted assets have been
classified into two parts – On-Balance Sheet Risk-Weighted Assets and Off-Balance
Sheet Risk-Weighted Items. The weightage of the risk assigned to them are shown
in the Appendix B and Appendix C respectively. The amount of risk-weighted assets
calculated by multiplying the amount of the asset with the weightage assigned to
them and the total of which will be extracted for the purpose of calculation of capital
adequacy ratios.

31. 22
As per the norms, the capital fund ratio would measure the total capital fund on the
basis of total risk-weighted assets. The capital fund ratio shall be determined as
follows:
Core Capital + Supplementary Capital
Capital Fund Ratio =
Sum of risk-weighted assets
× 100%
The sum of risk-weighted assets is the sum of total on-balance sheet risk-weighted
assets and total off-balance sheet risk-weighted items.
The banks shall, at the end of Ashoj (mid October), Poush (mid January), Chaitra
(mid April) and Ashad (mid July) of each fiscal year, prepare the Statements of
Capital Fund and other relevant statements on the basis of the financial statements as
per the prescribed Form No. 1 and Form No. 2 and submit to the Banking
Operations Department and Inspection and Supervision Department of this bank
within 1 (one) month from the end of each quarter. The prescribed form no. 1 and 2
are illustrated in Appendix D and Appendix E respectively.
In the event of non-fulfillment of Capital Fund Ratio in any quarter, the banks shall
fulfill the shortfall amount within next 6 (six) months. Until the fulfillment of such
Capital Fund, the banks shall not declare or distribute dividend to its shareholders
under Section 18 of Commercial Bank Act, 2031. The shortfall in the Capital Fund
may be rectified by issuing new shares and/or reallocating assets.
If any bank does not fulfill the minimum Capital Fund within the specified period,
NRB may initiate any of the following actions:
a) Suspension of declaration / distribution of dividend (including bonus shares).
b) Suspension of opening new branch.
c) Suspension of access to refinancing facilities of Nepal Rastra Bank.
d) Restriction on lending activities of the bank.
e) Restriction on accepting new deposits.
f) Initiation of any other actions by exercising the authority under Section 32 of
Nepal Rastra Bank Act, 2012.

32. 23
2.3 Empirical Review
2.3.1 Review of Articles and Reports
Lamsal (2001) stated that that the central bank rocked the commercial banks with
seven directives issued in two installments asking banks to start complying with the
new strictures by mid-July 2001 or face grave consequences. NRB claims that these
are based on the internationally accepted banking norms of Basel committee. Lamsal
has opined that banks are expected to be disparate to meet the targets of capital
adequacy norms since the consequences the banks have to face in case of
noncompliance are very strict. And for this purpose they will have to issue
additional shares, which is not possible for them in the short-run. Or they do not
prefer to go for additional share issue simply because they will also have to pay the
same dividend as the past to the holders of shares so issued. This becomes the more
difficult as the business is not going to expand commensurately. The difficulty is
understandable now when every banker is complaining of the lack of new
investment projects.
Shah (2003) concluded that being the central bank of the nation, Nepal Rastra Bank
has to be active by playing important role for monetary and financial stability. Central
bank should always be eager to achieve the public faith towards bank and financial
institutions enabling them being disciplined, well-organized, healthy and competent
by providing effective regulation and supervision to appropriate utilization and
mobilization of financial resources by increasing financial saving rate by raising
financial stability. Also, central bank should always be willing to safeguard the
interest of depositors and investors to accomplish the financial stability. Constant
financial stability leads to the accomplishment of monetary stability. As the tools for
monetary policy are applied through financial sector, the efficiency of monetary
policy depends on effectiveness of financial sector. Balanced growth of financial
sector helps monetizing of economy. Various drawbacks; like, managerial
ineffectiveness, organizational difficulty, contrary financial situation; make the long-
term stability of financial sector suspicious. Failure of any one financial institution

33. 24
leads the destructive impact to whole financial sector and such impact will be spread
to other countries from the countries where capital accounts are fully convertible. So,
the concept of financial system of the country should be boosting and healthy for
achieving higher economic growth rate by steadying macro economic stability has
been globally supported. The financial sector reform program in Nepal can also be
taken in the same background. Since, it is not possible to achieve financial stability
without the commanding role of regulation and supervision, new program of financial
sector reform program should play role regarding structural
reformation/transformation and organizational structure in existing banks and
financial institutions by clarifying the role of government and central bank.
Khatiwada (2003) enlightened that recent financial crisis have revealed a number of
data deficiencies, notably in pledged assets, deposits held in financially weak
domestic banks and their foreign affiliates, valuation practices leading to bank
valuation of assets being significantly different from market values and complicating
assessments of the realizable value of reserve assets. Similarly, public information is
lacking in many countries on the off-balance-sheet activities of the authorities that
can affect foreign currency resources. There was a lack of information on the
authorities’ financial derivatives activities. Also observed was the inadequate
information of actual and potential foreign liabilities of the monetary authorities and
central government. Financial sector reform envisages for measures for mitigating
this information and data gap problem as well.
Khatiwada has further written that Nepal initiated financial sector reform back in
1980s with donor initiative and assistance. In this process, some progress was made
in terms of re-capitalization of the government banks, divestment, branch
consolidation, introduction of new regulatory and prudential norms and cleaning up
the balance sheets of bad loan loaded banks. But the reform process was stalled in
the later 1990s due to political instability and the government’s priority in areas
other than the financial system. In between, the country observed, from very close
by, the financial crisis in the neighboring region. Keeping in mind the financial crisis
and its effect in the Asian region, the Nepal Rastra Bank is now focusing its

34. 25
attention on the reform measures in the financial sector as a drive towards new
financial architecture.
Khatiwada emphasized various reform majors. One of the measures was increasing
capital base and revising capital adequacy. Khatiwada stressed that experience has
shown that undercapitalized financial institutions are the ones that are first attacked
by the speculators and hedgers at the time of crisis and create contagious effect on
the other institutions as well. Besides, undercapitalized financial institutions cannot
gain credibility and corporate growth even in normal times. This requires that
financial institutions are adequately capitalized and possess resilience against attacks
by dealers and customers. In this context, the capital adequacy norms are being
revised upward as per the Basel Capital Accord. But increasing the capital base for
loss making government owned financial institutions is not easy without involving
private sector in the equity capital.
Pandey (2003) stressed that one of the main objectives of a commercial bank is to
safeguard the money of depositors. With the low capital adequacy rate, the banks
were previously lending from the money of the depositors because the capital
comprised a very small portion of the total risk-weighted assets. However, the
returns the shareholders or promoters were reaping were quite high. The risk of the
depositors was too high. Pandey further put forward that a good banking system is,
therefore, a sine qua non for maintaining financial equilibrium in the country. And,
NRB’s efforts in this direction are really praiseworthy.
Stokes (2003) has mentioned that banks hold capital in excess of reserve requirements
to provide a buffer against future, unexpected losses. Such losses are brought about by
the credit, market, and operational risks inherent in the business of lending money.
Problems created by an insolvent bank are important enough that bank regulators
enforce minimum capital standards on banks in an effort to safeguard depositors and
ensure the ongoing viability of the financial system. However, from a bank’s
perspective holding idle capital is an expensive safeguard against risk because the
bank’s shareholders demand a return on their investment and idle capital provides no

35. 26
such return. For this reason bankers and regulators can have divergent opinions about
the amount of capital a banks should hold making the problem of determining a
bank’s risk-based capital a complex and important question.
Heakal (2003) has written that the central bank has been described as “the lender of
the last resort,” which means that the central bank is responsible for providing its
economy with funds when commercial banks cannot cover a supply shortage. In
other words, the central bank prevents the country’s banking system from failing.
However, the primary goal of central banks is to provide their countries’ currencies
with price stability by controlling inflation. A central bank also acts as the regulatory
authority of a country’s monetary policy and is the sole provide and printer of notes
and coins in circulation. Time has proven that the central bank ca best function in
these capacities by remaining independent from government fiscal policy and
therefore uninfluenced by political concerns of any regime. The central bank should
also be completely divested of any commercial banking interests.
Keijser & Haas (2001) have summarized as the Basel Capital Accord of 1988 was
an important first milestone in the regulatory treatment of collateralized transactions.
However, the role played by risk mitigating factors in this Accord, such as the use of
financial collateral, is still rather limited. The same holds for the European directives
and national regulations derived from the Basel Accord. The regulatory treatment of
collateral has recently entered a new phase, in the form of the proposed revision of
the Basel Accord. The use of a wider range of collateral will be allowed in the new
Accord and banks will be able to choose either the comprehensive or the simple
approach for the treatment of collateral. Whereas the simple approach resembles the
current Basel substitution methodology in its treatment of collateral, the
comprehensive approach is more innovative. It assigns a central role to collateral
haircuts, which may be based on banks’ own internal estimates of collateral
volatility. By making a wider range of collateral available for credit risk mitigation
and making the calculation of risk-weighted assets more risk-sensitive, the revision
of the Basel Accord is intended further to align regulatory capital which banks must
hold and their actual economic risk structure.

36. 27
2.3.2 Review of Thesis Works
Pandey (2002) has given conclusion regarding the capital adequacy of HBL during
his study period, i.e., as of Poush end 2058 as the capital fund of HBL stands at Rs.
1070 million comprising of Rs. 756 million core capital and Rs. 314 million of
supplementary capital. The total risk weighted assets of HBL is equal to Rs. 12690.6
million. Therefore, the capital adequacy of the bank stands at 8.43% of total risk
weighted assets. Core capital is 5.96% and the supplementary capital is 2.47% of
total risk weighted assets. Hence, Pandey has concluded that HBL has surplus of Rs.
184.92 million of core capital and a shortfall of Rs. 257.08 million of supplementary
capital. The standard required to be maintained by HBL as per NRB by July 16,
2002 is 4.5% in each case totaling at 9% in all. However, according to the directives,
a shortfall in the supplementary capital can be fulfilled by the surplus in core capital.
Therefore, in case of HBL, the bank can use the excess of Rs. 184.92 million core
capital to compensate for the shortfall. But still the bank requires another Rs. 72.6
million to meet the requirement of supplementary capital. Pandey has suggested that
HBL should increase the capital base from Rs. 1070 million by at least Rs. 115
million to meet the capital adequacy ratio. For this, the bank should try to increase
its supplementary capital as it falls short by Rs. 73 million. The bank should increase
its core capital in order to expose itself to more credit risk.
Karmacharya (2002) has expressed that the financial soundness as well as its
strength of the company depends upon the large extend on the composition of the
capital structure and assets. Capital structure of the company presents its resource
capacity and ability of its present worthiness. In the study, he has found that the all
the banks in his study follows the requirements of NRB directives regarding capital
adequacy. The capital structure of studied banks is highly leveraged. Thus,
Karmacharya has recommended that the proportion of debt and equity capital
should be decided keeping in mind the effort of tax advantages and financial
distress. The banks are required to maintain improved capital structure by increasing
equity base i.e., issuing more equity capital, expanding general reserve and retaining
more earnings. With this improvement, it will compromise among the conflicting

37. 28
factors of cost and risk. As mandated by NRB, for the operation in all over Nepal, a
commercial bank should have capital base of Rs. 500 million. Hence, the banks
should raise its paid-up capital to Rs. 500 million as soon as possible.
Sapkota, U.P. (2002), in his study on fund mobilizing policy of Standard Chartered
Bank Nepal Ltd (SCBNL), has found that liquidity position of SCBNL was not
satisfactory. Loans & advances, cash & bank balance ratio seemed too weak than
that of NBBL and HBL. Investment on share & debenture and interest earning
power on total working fund also seemed in weak condition than that of NBBL &
HBL. Growth ratio of deposits, loans & advances, investments, net profits seemed
too weak in comparison to NBBL and HBL. The relation of investment and loans &
advances with deposits seems positive and the relation of net profit with outside
assets (investment and loans & advances) seemed positive. At last, Sapkota
concluded that in overall condition SCBNL seemed in satisfactory position in
comparison to NBBL & HBL. Since, SCBNL used to provide less loan & advances
in comparison to its total deposits, SCBNL Sapkota has strongly recommended
following a liberal lending policy so that more percentage of deposits can be
invested to different profitable sectors as well as towards loans & advances.
Because, analysis showed investment and loans & advances as a significant factor
this affects the net profit of the bank. Subsequently, a skillful administration is the
must for these assets because negligence may become a reason for liquidity crisis
and bankruptcy.
Pathak (1999), in his thesis, has found the capital adequacy ratios of NIBL and
NGBL are fluctuating in nature over the period of his study. Pathak has further
concluded that both the banks have been maintaining capital adequacy ratio as
directed by the central bank Nepal Rastra Bank in order to safeguard the depositors’
interest. However, it is found from student’s t-test that NIBL has higher capital
adequacy ratio than that of NGBL on an average. It can be concluded that NIBL has
maintained excess capital fund to safeguard the depositors’ interest.

38. 29
Sapkota, R. (2002), in his study on capital and assets structure management of
Nepal Bank of Ceylon Ltd, has found that the ratio of shareholders’ fund to total
deposit ratio reveals that in the year 2053/054 it was highest i.e. 101.40% and has
been decreasing in the succeeding years. The average ratio is 35.69. Also, the ratio
of shareholders’ fund in relation to total assets shows that average ratio is 21.22%. It
is concluded that its ratio are found decreasing throughout the study period.
Agrawal (2002), in his study on deposit and investment position of Yeti Finance
Company Ltd, has concluded that the major objective of financial institution is to
transfer capital between saver and those who need it. Such institutions are
established with the aim of further intensifying the participation of assisting
industries and private sector in regular supply of funds. Financial institutions serve
as a financial intermediaries, transfer money and securities between firm and saver
that create a new financial product. Agrawal further commented that the major
classes of financial intermediaries are commercial banks, mutual saving bonds,
credit unions and pension funds, life insurance companies and finance companies.
Within a short span of time they are showing encouraging trend in the financial
sector, both in collecting and investing funds. They are able to tap even smaller
amount of saving from public and investing in different production sectors.
Shrestha (2002) has stated that in a situation when the existing financial
institutions, especially government owned commercial banks were unable to supply
credit timely and carry capital market activities, private joint venture commercial
banks have contributed a lot. The overall performance of joint venture commercial
banks is satisfactory and NRB has to play more active role to enhance the operation.
The analysis of liquidity position of sample joint venture commercial banks (Nabil
Bank Ltd, Standard Chartered Bank Ltd and Nepal SBI Bank Ltd) have satisfactory.
Initially the major part of these banks was consisting of business and industrial loan;
this is the indication of investment on productive sector. Nowadays, these banks are
slowly turned on hire purchase and housing financing.

39. 30
Strengthening and institutionalization of the commercial banks is very important to
have a meaningful relationship between commercial banks and national
development through shift of credit to the productive industrial sectors. At the same
time the series of reforms such as consolidation of commercial banks, directing
attention to venture capital financing, appropriate risk return trade of by linking
credit to timely repayment schedules, avoiding imperfections, allowing flexibility in
lending, one window service from NRB, need of a strong supervision and
monitoring from NRB, diversity scope of activities for commercial banks,
professional culture within commercial banks, etc. All these are necessary to ensure
better future performance of commercial banks that have already been established
and growing in Nepal.
Ranjit (1989) has indicated that capital funds have positive and significant relation
with both deposits and loans. That means increase or decrease in capital fund
increases or decreases deposits as well as loans. However the degrees of relationship
were different. But relation of capital with profit was positive and insignificant. That
indicated less of increase or decrease in profit is due to capital fund or capital fund is
least responsible in changing profit. Bank should increase capital fund to increase
the capital fund ratio according to increase in deposits.
Shivakoti (2003), in his study of capital & assets structure of Nepal Industrial
Development Corporation (NIDC), has concluded that the financial soundness of a
company as well as its strength depends largely on the capital and assets structure.
The capital structure presents its resource capacity and viability where as the asset
structure presents its worthiness. The composition of the capital and assets holds the
utmost importance so far the successful and thriving operation of NIDC. Shivakoti
stated that NIDC prefers the long-term borrowing in form of capital and uses it in
long-term loan as assets. The fixed assets, investment in shares and debentures,
current assets and liabilities, share capital, reserve and surplus are other components
associated with capital and assets structure of NIDC. Shivakoti found that the
contribution of different components of capital and assets structure in EBIT of
NIDC to be less satisfactory. The relation is positive which showed EBIT was

40. 31
increasing with other variables correlated but the low degree of correlation between
them meant the relationship between these EBIT and other variables lacks closeness
in its increasing trend.
Kadel (2002), in his study on financial performance of NGBL and HBL, has
concluded as many commercial banks have been competing with each other in their
business. When the government adopted liberal policy, as a result many commercial
banks especially joint-venture banks increased rapidly i.e., Himalayan Bank Ltd,
Nepal SBI Bank Ltd, Nepal Grindlays Bank Ltd, etc. These banks are mainly
concentrated themselves on financing foreign trade, commerce and industry and
other sectors. Banking helps to mobilize the small savings collectively to the huge
capital investment though the banking is considered as the platform of money
market.

41. C HAPTER 3
R ESEARCH M ETHODOLOGY
Research Methodology can be understood as a science of studying how research has
been done. This chapter looks into the research design, nature and sources of data,
data collection procedure and tools & technique of analysis. For the purpose of
achieving the objectives of the study, the applied methodologies are used. The
research methodology used in the present study is briefly mentioned below.
3.1 Research Design
This study research attempts to analyze the capital funds of commercial banks taking
the data and information of BOK and HBL. The research design is basically focused
on analytical study. Ratio analysis, correlation analysis and testing of hypothesis
have been done for analyzing the research. The research examines the relationship of
bank capital to various other stakes, like deposits, credits, etc.
3.2 Population and Sample
There are total 16 commercial banks presently operating in Nepal. Collecting the
data of these entire commercial banks is not possible. Hence, Bank of Kathmandu
Ltd (BOK) and Himalayan Bank Ltd (HBL) have been selected for the case study.
Thus, the population of the study comprises of all these commercial banks and the
samples are BOK and HBL.

42. 33
Also, through the research questionnaire, various responds of the respondents have
been considered as sample for the study. Twelve bank officials have been
interviewed with a questionnaire prepared as in Appendix K. There are total 72
respondents of the research questionnaire for depositors as shown in Appendix L.
3.3 Data collection procedure
The data and information are collected from both the primary and secondary
sources. For the primary information, research interview and questionnaires are
used. The research interview questionnaire, as shown in Appendix K, was set to
interview bank officials. The research questionnaire as shown in Appendix L was set
for bank account holders who are known as depositors in this thesis report.
For the collection of secondary data and information, directives of Nepal Rastra
Bank, annual reports of BOK, annual reports of HBL, various publications of Nepal
Rastra Bank, magazines, the other publications and the internet have been used.
Also, for other related information, various books and periodicals have been referred
from library and some that the researcher self has.
3.4 Data Analysis Tools
Before analyzing the data, the data and information have been presented
systematically in the formats of Tables, Graphs and Charts which will explain a lot
about the data and information collected.
For the analysis of the research study, the following financial tools and statistical
tools are used.
3.4.1 Financial Tools
Ratio analysis is the best tool for financial analysis. Ratios can be taken as
expression of relationships between two items or group of items and therefore may

43. 34
be calculated in any number and ways so far meaningful co-relationship is
obtainable.
Pandey (1995) emphasizes that a ratio is used as a benchmark for evaluating the
financial position and performance of a firm.
The following ratios related to the banks are used to analyze the data:
(a) Capital Adequacy Ratio:
Capital adequacy ratio is the foremost tool to analyze the capital fund of a bank.
Actually, the fundamental objective of this research study is to examine capital
adequacy of HBL and BOK.
The capital adequacy ratio is based on total risk-weighted assets (TRWA) of the
bank. Capital adequacy ratios are a measure of the amount of a bank's capital
expressed as a percentage of its risk weighted credit exposures. This ratio is used to
examine adequacy of total capital fund and core capital, which is yielded by the
following formulas:
To measure the adequacy of total capital fund:
Total Capital Fund
TRWA
× 100%
To measure the adequacy of core capital:
Core Capital
TRWA
× 100%
(b) Capital to Deposit Ratio:
The capital to deposit ratio is an important tool in measuring capital adequacy ratios
of banks. But, this ratio can not reflect the capital adequacy of a bank.
Patheja (1994) has stressed that the capital to deposit ratio has enjoyed the longest
use of any ratio devised to measure and determine capital adequacy.

44. 35
The capital to deposit ratio is derived by the following formula:
Total capital fund
Total deposit collected
× 100%
(c) Credit / Deposit Ratio:
The credit / deposit ratio (CD ratio) is a major tool to examine the liquidity of a
bank. CD ratio measures the ratio of fund that a bank has utilized in credit out of the
deposit total collected. More the CD ratio more the effectiveness of the bank to
utilize the fund it collected.
The CD ratio is derived by the following formula:
Total Credit
Total deposit collected
× 100%
3.4.2 Statistical Tools
The following statistical tools are used to analyze the data:
(a) Karl Pearson Correlation Analysis:
The relation between two variables is correlated by Karl Pearson’s correlation co-
efficient. The following is the formula proposed by Karl Pearson for calculation of
correlation coefficient.
NΣXY - (ΣX)(ΣY)
r=
√[NΣX - (ΣX)2] √[NΣY2 - (ΣY)2]
2
Where,
N = Numbers of pairs in observation
X = Product of the first variable
Y = Product of the second variable

45. 36
To ease the calculation, a shortcut formula has been proposed which has been used
in to calculate correlation coefficients in this thesis report. The shortcut formula is as
follows:
Σxy
r=
√Σx2. √Σy2
Where,
x = (X-¯ )
X
y = (Y-¯ )
Y
(b) Test of Hypothesis:
The calculated correlation coefficients have been used to test the hypothesis as
proposed in Chapter 1 by using the following t-test formula:
r×√n-2
t=
√1-r2
Where,
r = calculated correlation coefficient
n = number of observations
The hypotheses have been tested with at a 95% level of confidence.

46. C HAPTER 4
D ATA P RESENTATION AND A NALYSIS
This chapter deals with the presentation, analysis and interpretation of relevant data
and information of BOK and HBL. Also, the analysis and interpretation of the
information and data produced from questionnaire is also contained in this chapter.
To obtain best result, the data and information have been analyzed according to the
research methodology as mentioned in the Chapter 3.
The main purpose of analyzing the data is to change it from an unprocessed form to
an understandable presentation. The analysis of data consists of organizing,
tabulating, and performing statistical analysis. (Wolff & Pant, 1999)
This chapter is partitioned into the sections of (1) Presentation of Data, (2) Ratio
Analysis, (3) Statistical Analysis, (4) Impact of Capital Adequacy Norms, (5) Study
of Perception of Depositors, and (6) Findings.
4.1 Presentation of Data
The collected data and information are presented in this section. Various tables,
charts and graphs are used to best present the data. The data and information has
been presented in most understandable format.
4.1.1 Capital Fund
Capital fund of a bank consists of two types of components: Tier-1 capital and Tier-
2 capital. Tier-1 capital is known as core capital and Tier-2 capital is known as
supplementary capital. Hence, the total capital fund of a bank derived by adding

47. 38
these two components of capital. The capital funds of BOK and HBL has been
illustrated hereinafter separately.
4.1.1.1 Capital Fund of BOK
BOK issued 30% bonus shares from the profit of FY 1999/2000 amount at Rs. 54
million. The bank also issued right shares with the right of 1:1 in the FY 2001/2002.
In this way BOK increased its share capital to Rs. 464 million totaling the core
capital at Rs. 511.50 million.
The capital funds of BOK have been tabulated in Table 4.1 which shows the capital
fund of the bank over the period of last five fiscal years, i.e., from FY 1997/1998 to
FY 2001/2002.
Table 4.1
Capital Fund of BOK
(amount in million)
At the end of Supplementary Total Capital
Core Capital
Fiscal Year Capital Fund
1997/98 92.07 77.87 169.94
1998/99 95.92 75.55 171.47
1999/00 249.36 102.33 351.69
2000/01 318.70 167.36 486.06
2001/02 511.50 220.40 731.90
Source: Annual Reports of BOK
In the five years period, BOK has been gradually increasing its capital base. BOK
has been increasing both components of capital simultaneously. However, the core
capital has been significantly increased over the five years period. The capital fund
of BOK consisted core capital of Rs. 92.07 million and supplementary capital of Rs.
77.87 million totaling Rs. 169.94 million at the end of fiscal year 1997/98. The

48. 39
capital fund have been increased to Rs. 511.50 million of core capital and Rs. 220.40
million of supplementary capital totaling Rs. 731.90 million at the end of FY
2001/02.
The same can be viewed in a chart format in Figure 4.1.
Figure 4.1
Trend of Capital Fund of BOK
Capital Fund of BOK
800
700
Amount (Rs. in million)
600
500 Core Capital
400 Supplementary Capital
300 Total Capital Fund
200
100
0
1997/98 1998/99 1999/00 2000/01 2001/02
Fiscal Year
The Figure 4.1 shows the growing trend of capital fund of BOK during the five
fiscal years. The trend shows that both forms of capital are in increasing trend.
However, the bar of core capital has been significantly rising higher whereas the bar
of supplementary capital is increasing gradually.
The increment of capital fund shows that BOK has been trying to increase its capital
base to comply with the requirements of NRB as prescribed in capital adequacy
norms for commercial banks.

49. 40
4.1.1.2 Capital Fund of HBL
HBL also has been increasing its capital fund. The bank issued bonus shares in the
FY 1998/99 by 60%, in the FY 1999/2000 by 25%, in the FY 2000/01 by 25% and
in the FY 2001/02 by 30%. The bank has a plan to issue bonus shares by 10% every
year till the paid up-capital meets the mandatory of Rs. 1 billion slab. The bank
issued “HBL Bond 2066” – an unsecured subordinated term debt – in the fiscal year
2001/02 amounting at Rs. 360 million to increase its supplementary capital. The
issuance of the bond was the first ever bond issued by a bank in Nepal which is
being traded in security market.
The capital funds of HBL over the period of last five fiscal years, i.e., from FY
1997/1998 to FY 2001/2002 have been illustrated in Table 4.2.
Table 4.2
Capital Fund of HBL
(amount in million)
At the end of Supplementary Total Capital
Core Capital
Fiscal Year Capital Fund
1997/98 298.87 192.54 491.41
1998/99 388.79 258.31 647.10
1999/00 448.08 362.45 810.53
2000/01 698.70 499.61 1,198.27
2001/02 834.55 638.42 1,472.97
Source: Annual Reports of HBL
In the five years period, HBL has significantly increased its capital base. HBL has
been increasing both form of capital simultaneously. At the end of fiscal year
1997/98, HBL had core capital of Rs. 298.87 million and supplementary capital of
Rs. 192.54 million totaling Rs. 491.41 million, which have been increased to Rs.

50. 41
831.55 million of core capital and Rs. 638.42 million of supplementary capital
totaling Rs. 1,472.97 million by the end of fiscal year 2001/02.
The increasing trend of capital fund of HBL can be viewed in the Figure 4.2 in a
chart format.
Figure 4.2
Trend of Capital Fund of HBL
Capital Fund of HBL
1600
1400
Amount (Rs. in million)
1200
1000
Core Capital
800 Supplementary Capital
Total Capital Fund
600
400
200
0
1997/98 1998/99 1999/00 2000/01 2001/02
Fiscal Year
The Figure 4.2 shows that HBL is increasing both forms of capital gradually. It can
be observed that both the bars are rising at a same pace. It can be said that HBL is
successfully maintaining the ratio of core and supplementary capital at the same
level.
The main rationale behind the increment of the capital fund has been to comply with
the requirement of NRB capital adequacy norms for commercial.

51. 42
4.1.2 Risk-Weighted Assets of BOK and HBL
The risk-weighted assets are derived by calculating the amount from the respective
on- and off-balance sheet items with the prescribed weightage. The assets are
categorized into four types while assigning weightage to them. NRB has assigned
weightage of 0%, 20%, 50% and 100% according to their nature of risk bearing
which is based on the standard of Basel Committee.
The risk-weighted assets of BOK and HBL have been illustrated in Table 4.3. The
table shows the risk-weighted assets of the two banks over the period of last two
fiscal years, i.e., FY 2000/2001 and FY 2001/2002.
Table 4.3
Risk Weighted Assets of BOK & HBL
(Amount in Rs. million)
At the end of Fiscal Year BOK HBL
1997/98 1551.96 5603.31
1998/99 2586.27 7685.27
1999/00 3938.30 10093.77
2000/01 5651.95 14956.93
2001/02 5074.23 12746.17
Source: Annual Reports of BOK & HBL
4.1.3 Deposit Trend of BOK and HBL
Being the main function of a commercial bank, every commercial bank collects
deposit from general public. Verma & Malhotra (1993) has mentioned that a
commercial bank has usually access to three sources of fund: capital fund, deposits
and borrowings.

52. 43
It is clear that BOK and HBL could not remain in the business without collecting
deposits. Both banks have different policy to lure deposits from general public. In
this matter, HBL has a scheme of Premium Saving Account (PSA), which is proved
to be the most important product of HBL. PSA has helped to attract most deposits
from general public. BOK is also planning to introduce similar type of product.
The deposit collection trends of BOK and HBL for last five fiscal years can be
viewed in figures in the Table 4.4 which also includes the national total and the
share of BOK and HBL on it.
Table 4.4
Deposit Collection Trend of BOK, HBL and National Total
(Rs. in million)
At the end of National Share of Share of
BOK HBL
Fiscal Year Total BOK HBL
1997/98 1,773.87 7,713.60 102,598.2 1.73 % 7.52 %
1998/99 2,564.83 9,772.74 127,201.7 2.02 % 7.68 %
1999/00 4,196.41 14,043.10 154,943.0 2.71 % 9.06 %
2000/01 5,713.49 17,636.85 181,767.0 3.14 % 9.70 %
2001/02 5,723.30 18,619.38 185,053.2 3.09 % 10.06 %
Source: Annual Reports of BOK, HBL & Banking & Financial Statistics (2002)
The Table 4.4 shows that BOK and HBL have been gradually increasing the deposit
collection. BOK has, however, a small share in the total national deposits than that
of HBL. HBL has more than 10% share in national deposit collections at the end of
fiscal year 2001/02. In the year 2001/02 BOK has collected deposits amounting at
Rs. 5723.30 million whereas HBL has collected deposits amounting at Rs. 18619.38
million. The total deposit collections by all the banks at the end of fiscal year
1997/98 amounted at Rs. 102,598.2 million which increased to Rs. 185,053.2
million at the end of fiscal year 2001/02. The table 4.4 shows that HBL is far much

53. 44
ahead in deposit collection. In fact, HBL is in the second position between private
sector banks in collecting deposit.
The deposit collection by BOK, HBL and other remaining banks by the end of FY
2001/02 are illustrated in the Figure 4.3 in a pie-chart format.
Figure 4.3
Share of BOK & HBL on Total National Deposit Collections
Share of BOK & HBL on Total National Deposits by the
end of Fiscal Year 2001/2002
BOK
3%
HBL
10%
Others
87%
The Figure 4.3 shows the share of BOK and HBL on total national deposit
collection. BOK has a less share in deposit collection therefore it has a small pie.
But HBL has a big pie, as it has more than 10% share in total national deposit
collections. It is a fact that HBL is the no. 1 joint-venture bank in the country in
collecting the deposits from public.

54. 45
4.1.4 Credit Trend of BOK and HBL
The main source of income of a bank is interest income from credit. Most of the
amounts of deposit collected are used for credit lending.
Bhandari (2003) believes that the commercial banks are inspired wit the motive of
gaining profit. To fulfill this objective, they should widely manage and improve
banking sector. They must pay much more attention to the flow of loan.
Being commercial banks, one of the prime functions of BOK and HBL is credit
lending. The credit lending trends of BOK and HBL for last five fiscal years have
been illustrated in the Table 4.5 including the national total and their share on it.
Table 4.5
Credit Trend of BOK, HBL and National Total
(amount in million)
At the end of National % Share % Share
BOK HBL
Fiscal Year Total of BOK of HBL
1997/98 1,177.87 4,223.07 68,618.0 1.72 6.15
1998/99 1,863.40 5,245.98 81,757.7 2.28 6.42
1999/00 3,087.63 7,224.73 96,324.8 3.21 7.50
2000/01 4,285.93 9,015.35 109,151.2 3.93 8.26
2001/02 4,890.07 9,557.14 114,852.2 4.26 8.32
Source: Annual Reports of BOK, HBL & Banking & Financial Statistics (2002)
The Table 4.5 shows that BOK and HBL both are very much eager to flow loan.
This is very much clear by the statistics of their credit trend for last five fiscal years.
Both the banks are growing there share of credit in the market. BOK had credit of
Rs. 1,177.87 million at the end of FY 1997/98 making the total market share of
1.72% where as, the bank increased its share up to 4.26% at the end of FY 2001/02
total amounting at Rs. 4,890.07 million. HBL had its share of credit in the market

55. 46
was 6.15% at the end of FY 1997/98 amounting at Rs. 4,223.07 million. The amount
is increased at Rs. 9,557.14 million at the end of FY 2001/02 making the market
share of HBL at 8.32%.
The credit flow of BOK, HBL and other remaining banks by the end of FY 2001/02
are illustrated in the Figure 4.4 in a pie-chart format.
Figure 4.4
Share of BOK & HBL on Total National Credit
Share of BOK & HBL on Total National Credit by the
end of Fiscal Year 2001/2002
BOK
4%
HBL
8%
Others
88%
In the Figure 4.4, the share of BOK and HBL on total national credit can be viewed.
Since BOK has a lesser share of 4% in credit therefore it has a small pie, where as
HBL has a bigger pie as it has a share of more than 8%.

56. 47
4.2 Ratio Analysis
The following ratios are used to evaluate the financial statements of HBL and BOK
in regard of the capital adequacy and capital fund.
4.2.1 Capital Adequacy Ratios of BOK and HBL
Capital adequacy ratio shows the strength of a bank. The calculation of capital
adequacy ratios of BOK and HBL has been presented in Appendix F. The calculated
capital adequacy ratios are shown in the Table 4.6 for the year FY 1997/98 to FY
2001/02:
Table 4.6
Capital Adequacy Ratios of BOK & HBL
BOK HBL
At the end of Fiscal
Percentage Percentage Percentage Percentage
Year:
of Total of Core of Total of Core
Capital: Capital: Capital: Capital:
1997/1998 10.95 % 5.93 % 8.77 % 5.33 %
1998/1999 6.63 % 3.71 % 8.42 % 5.06 %
1999/2000 8.93 % 6.33 % 8.03 % 4.44 %
2000/2001 8.60 % 5.64 % 8.01 % 4.67 %
2001/2002 14.42 % 10.08 % 11.56 % 6.55 %
Detail calculations shown in Appendix F.
The capital adequacy ratios of BOK and HBL show that the both banks are able to
comply with the requirements of NRB. The minimum requirements of NRB for the
two FY were total capital at 8% and 9% and core capital at 4% and 4.5% on total
risk-weighted assets.

57. 48
In the FY 2000/01, has a total capital fund at 8.60% and core capital at 5.64% of
total risk-weighted assets. BOK has significantly increased the ratio in FY 2001/02
at 14.42% and 10.08% respectively.
In the FY 2000/01, HBL has maintained the total capital fund at 8.01% and core
capital at 4.67% of total risk-weighted assets. The same ratio in FY 2001/02 was at
11.56% and 6.55% respectively.
4.2.2 Capital to Deposit Ratios of BOK and HBL
The capital to deposit ratio has a significant role in measuring capital adequacy
ratios of banks. Calculation of capital to deposit ratios of BOK and HBL are shown
in Appendix G. The Table 4.7 shows the capital to deposit ratios for the period of
five fiscal years starting from FY 1997/98 to FY 2001/02.
Table 4.7
Capital to Deposit Ratios of BOK & HBL
At the end of Fiscal Year BOK HBL
1997/98 9.58 % 6.37 %
1998/99 6.69 % 6.62 %
1999/00 8.38 % 5.77 %
2000/01 8.51 % 6.79 %
2001/02 12.79 % 7.91 %
Detail calculations shown in Appendix G.
As per the Table 4.7, the capital to deposit ratios of the both banks seems to be
inadequate. It is assumed that the capital to deposit ratio should be 10%. However,
the ratios of BOK can be considered OK as 8% ratio is also accepted to be adequate.

58. 49
The capital-to-deposit ratios of BOK are at around 6% to 9% till the end of fiscal
year 2000/01. However, BOK has been able to overcome and maintained the ratio at
12.79%. The capital-to-deposit ratios of HBL are in between 5% to 8%.
4.2.3 Credit / Deposit Ratios of BOK and HBL
The credit / deposit ratio (CD ratio) is a major tool to examine the liquidity of a
bank. Calculation of CD ratios of BOK and HBL are shown in Appendix H. The
Table 4.8 shows the CD ratios for the period of five fiscal years starting from FY
1997/98 to FY 2001/02.
Table 4.8
Credit/Deposit Ratios of BOK & HBL
At the end of Fiscal Year BOK HBL
1997/98 66.40 % 54.75 %
1998/99 72.65 % 53.68 %
1999/00 73.58 % 51.45 %
2000/01 75.01 % 51.12 %
2001/02 85.44 % 51.33 %
Detail calculations shown in Appendix H.
As per the Table 4.8, the CD ratios of the both banks shows that their liquidity
position is quite sound. However, BOK is seems to more efficient to utilize the
funds collected as deposit. The CD ratio of BOK was 66.40% at the end of fiscal
year 1997/98 which is in increasing trend and reached at 85.44% at the end of fiscal
year 2001/02. But the CD ratio of HBL is persistent to 51% to 54%.
Although there is not any standard for CD Ratios in Nepal, a ratio of 75% can be
accepted to be adequate. As such BOK is somehow nearer to this standard, but HBL
has very low CD ratios.

59. 50
4.3 Statistical Analysis
Statistical analysis is carried out for better understanding of the collected data and
information. The result of the statistical analysis is enumerated in the following
section.
4.3.1 Correlation co-efficient
To test the relationship between deposit and capital and between credit and capital,
the correlation coefficients have been calculated by using Karl Pearson’s correlation
coefficient. A detail calculation has been illustrated in Appendix I. The calculated
values of correlation coefficients are presented below in the Table 4.9.
Table 4.9
Correlation coefficients
Correlation between BOK HBL
Capital & Deposit 0.911 0.962
Capital & Credit 0.957 0.967
Detail calculations shown in Appendix I.
The calculated correlation coefficients between Deposit and Capital and correlation
coefficients between Credit and Capital are positive. Therefore, it can be said that
Deposit and Credit components of a bank are positively correlated with the bank’s
capital fund. Here, we can see that all the coefficients are near to 1 which indicates
that the correlations seem to be nearly perfectly positive. We can say that the
increase in capital causes the increase in Deposit. Also increase in capital causes
increase in credit.

60. 51
4.3.2 Test of Hypothesis
As proposed in the first chapter, the calculated values of correlation coefficients
presented in Table 4.9 are tested by using t-test. The tests are shown in the Appendix
J. The results of the tests are presented in Table 4.10, Table 4.11, Table 4.12 and
Table 4.13.
Table 4.10
Hypothesis 1
Hypothesis (H0) Capital and Deposit of BOK are not correlated.
Hypothesis (H1) Capital and Deposit of BOK are correlated.
Correlation coefficients (r) 0.911
Calculated Value (tcal) 3.827
Tabulated Value (ttab) 3.18
Degree of Freedom (d.f.) 3
Level of significance (α) 5%
Decision H0 rejected i.e.; Capital and Deposit of BOK are
correlated.
Calculations are shown in Appendix J-1.
Table 4.11
Hypothesis 2
Hypothesis (H0) Capital and Deposit of HBL are not correlated.
Hypothesis (H1) Capital and Deposit of HBL are correlated.
Correlation coefficients (r) 0.962
Calculated Value (tcal) 6.102
Tabulated Value (ttab) 3.18
Degree of Freedom (d.f.) 3
Level of significance (α) 5%
Decision H0 rejected i.e.; Capital and Deposit of HBL are
correlated.
Calculations are shown in Appendix J-2.

61. 52
Table 4.12
Hypothesis 3
Hypothesis (H0) Capital and Credit of BOK are not correlated.
Hypothesis (H1) Capital and Credit of BOK are correlated.
Correlation coefficients (r) 0.957
Calculated Value (tcal) 5.714
Tabulated Value (ttab) 3.18
Degree of Freedom (d.f.) 3
Level of significance (α) 5%
Decision H0 rejected i.e.; Capital and Credit of BOK are
correlated.
Calculations are shown in Appendix J-2.
Table 4.13
Hypothesis 4
Hypothesis (H0) Capital and Credit of HBL are not correlated.
Hypothesis (H1) Capital and Credit of HBL are correlated.
Correlation coefficients (r) 0.967
Calculated Value (tcal) 6.574
Tabulated Value (ttab) 3.18
Degree of Freedom (d.f.) 3
Level of significance (α) 5%
Decision H0 rejected i.e.; Capital and Credit of HBL are
correlated.
Calculations are shown in Appendix J-4.
The test of hypothesis as above showed the existence of relationship between capital
& deposit and capital & credit of both BOK and HBL. Therefore, it has been
concluded that capital & deposit and capital & credit of both banks are correlated
which indicates that increase in capital causes increase in deposit. As well as
increase in capital causes increase in credit. The same phenomenon is expected in
case of both the banks.

62. 53
4.4 Impact of Capital Adequacy Norms on BOK and HBL
4.4.1 Study of Changes in Capital Fund of BOK and HBL
The capital adequacy norms have greater impact on changes in capital fund of
commercial banks. Table 4.1 and Table 4.2 have already presented the components
of capital that are included in capital funds of BOK and HBL respectively. The
Table 4.15 shows the raise of capital funds of both banks in the form of amount and
percentage.
Table 4.15
Changes in Capital Fund of BOK and HBL
(Rs. in million)
Fiscal Amount Percentage Amount Percentage
BOK HBL
Year Increased Increment Increased Increment
1997/98 169.94 -- -- 491.41 -- --
1998/99 171.47 1.53 0.90 % 647.10 155.69 31.68 %
1999/00 351.69 180.22 105.10 % 810.53 163.43 25.26 %
2000/01 486.06 134.37 38.21 % 1,198.27 387.74 47.84 %
2001/02 731.90 245.84 50.58 % 1,472.97 274.70 22.92 %
In the beginning of the study period BOK had total capital fund of Rs. 164.94
million which has been increased up to Rs. 245.84 million by the end of FY 2001/02
being annual increment of 0.90%, 105.10%, 38.21% and 50.58%. As well as HBL
had capital fund of Rs. 491.41 million in the beginning of the study period. HBL
increased its capital fund up to Rs. 274.70 million by the end of FY 2001/02 being
annual increment by 31.68%, 25.26%, 47.84% and 22.92%.
Therefore the capital adequacy norms have impact on commercial banks making
them increase their capital fund every year.

63. 54
4.4.2 Study of Changes in Share Capital of BOK and HBL
It has been observed in Table 4.10 that the capital base of both BOK and HBL has
been increased. Since, the capital adequacy norms require that the core capital be at
least 50% of the total capital base, the banks has been increasing the core capital
accordingly. The Table 4.16 shows that the raise of new capital of both banks.
Table 4.16
Changes in Share Capital of BOK and HBL
(Rs. in million)
Fiscal Amount Percentage Amount Percentage
BOK HBL
Year Increased Increment Increased Increment
1997/98 90.00 - - 120.00 - -
1998/99 90.00 - - 192.00 72.00 60.00 %
1999/00 173.63 83.63 92.92 % 240.00 48.00 25.00 %
2000/01 233.65 60.02 34.57 % 300.00 60.00 25.00 %
2001/02 463.58 229.93 98.41 % 390.00 90.00 30.00 %
In the beginning of the study period BOK had paid-up capital of Rs. 90 million
which has increased to Rs. 173.63 million by the end of FY 1999/00, to Rs. 233.65
million by the end of FY 2000/01 and to Rs. 463.58 million by the end of FY
2001/02. As well as HBL had paid-up capital of Rs. 120 million in the beginning of
the study period. HBL increased it capital to Rs. 192 million by the end of FY
1998/99, to Rs. 240 million by the end of FY 1999/00, to Rs. 300 Million by the end
of FY 2000/01 and to Rs. 390 million by the end of FY 2001/02. In addition to
comply with the norms, HBL has issued bonds amounting at Rs. 360 million in the
fiscal year 2001/02.
The impact of the norms thus caused the increment of the paid-up capital of both the
banks.

64. 55
4.4.3 Study of Response of Officials of BOK and HBL
Regarding the impact of capital adequacy norms a questionnaire was developed as
shown in Appendix K. A total number of twelve officials of BOK and HBL
participated in the quarries.
The questionnaire revealed opinions of the bank officials towards the capital and
capital adequacy. All the officials agreed unanimously that the central bank should
issue Capital Adequacy Norms for commercial banks. All the respondents answered
that an adequate capital fund will always safeguard the interest of depositors.
However, in some questions the officials found to be disagreeable. Out of twelve,
seven respondents answered that the capital adequacy ratio prescribed by NRB is
perfect while remaining answered that it is high. It seemed that the officials are not
quite satisfied with the prescribed capital adequacy ratios. As well as, seven
respondents said that the changes brought in by NRB are necessary while the
remaining said that it is not at all necessary. Seven respondents answered that the
weightage on risk-weighted assets prescribed by NRB are just OK while other
officials said that it should be revised.
Officials of BOK opine that they can increase both components of capital to cope up
with the NRB requirements. However, officials of HBL believe that at present it is
not necessary to increase capital but in future they can increase both components of
capital.
4.5 Study of Perception of Depositors on Commercial Banks
To study the perception of depositors a questionnaire was developed as shown in
Appendix L. A total number of 72 depositors responded to this questionnaire.
While responding to the why they deposit their money in a bank, 75% respondents
answered that they deposit their money in a bank for security reason. 29% said that

65. 56
to earn interest. 12.5% deposits money to meet the official purpose. 4.17% said that
they deposit money in a bank for social status. And 8.33% referred to other reasons.
Out of the 72 respondents, 41.67% said that physical security arrangement of a bank
is most important to make a depositor’s money safe. 25% agreed that an adequate
capital is required to make a depositor’s money safe. 20.83% said that profitability
of the bank is important whereas 12.5% referred to the status of the bank as most
important.
75% respondents think that a bank should pay an attractive interest rate to attract
more deposits. 29.17% urged to arrange proper security. 25% insist on to achieve a
good profit. Only 20.83% advised to maintain adequate capital fund. The remaining
12.5% referred to other reasons that attract deposits to a bank.

66. C HAPTER 5
SUMMARY, FINDINGS, CONCLUSION & RECOMMENDATION
5.1 Summary
This research aimed at studying capital adequacy norms for commercial banks set by
NRB with case study of BOK and HBL. Raise and utilization of funds are the
primary functions of commercial banks. As such, commercial banks collect a large
amount of deposits from general public. Capital must be sufficient to protect a
bank’s depositors and counterparties from the risks like, credit and market risks.
Otherwise the banks will use all the money of depositors in their own interest and
depositors will have to suffer loss.
Being the central bank of Nepal, NRB has the responsibility to give special attention
to the interest of depositors. NRB has issued various directives to regulate
commercial banks. The directive no. 1 has been issued for norms on capital
adequacy to be followed by commercial banks.
The thesis report has been prepared with the study of capital funds of BOK and
HBL. The study showed that the capital fund of BOK and HBL meet the
requirements of the norms. Capital Adequacy Ratios have been calculated to check
the adequacy as per the norms. Capital-to-deposit ratios and CD ratios, which are
key ratios of commercial banks, have also been checked. Analyses have been done
to check the relationship of capital fund with deposit and credit. Four test of
hypothesis have been done to check the existence of the relationship of these
components.

67. 58
The thesis also studies the responses of 12 bank officials has also been done through
research interview. Also, the perception of 72 depositors has also been studied
through the questionnaire.
5.2 Findings
The thesis has been concentrated on the capital and capital related items of BOK and
HBL. The findings of the study are as follows:
Capital Fund: Capital fund of BOK is less than that of HBL. Over the study period,
capital fund of HBL seems to be consistently growing whereas capital fund of BOK
does not seem to be growing consistently. BOK has total capital fund of Rs. 169.94
million in FY 1997/98 which has been increased by 0.90% in the next year. The
capital fund has been increased by 105.10%, 38.21% and 50.58% in the succeeding
years making a total capital fund of Rs. 791.90 million by the end of FY 2001/02.
HBL had a total capital fund of Rs. 491.41 million at the end of FY 1997/98. HBL
increased its capital fund by 31.68 %, 25.26%, 47.84% and 22.92% in the
succeeding years making a total capital fund of Rs. 1,472.97 million by the end of
FY 2001/02. It has been learnt that HBL has nearly a double capital fund than that of
BOK. The capital funds of both banks are largely depend upon share capital.
Capital Adequacy: It is found that both the banks are quite successful in
maintaining capital adequacy as prescribed by NRB. But BOK had a capital
adequacy ratio of 6.63% in FY 1998/99 which seems inadequate as NRB had
prescribed it to be at least 8%. In other years both banks have meet the requirement.
In the last year of the study i.e., in FY 2001/02, both banks have quite higher capital
adequacy ratio than prescribed ratio. In FY 2001/02 BOK has capital adequacy ratio
of 14.42 % and HBL has the same ratio of 11.56 % while the requirement of norms
directed by NRB is only 9%.
Risk-weighted Assets: While studying the capital adequacy the most significant
component is risk-weighted assets. BOK had risk-weighted assets of Rs. 1,551.96

68. 59
million in the year 1997/98 which is increased to Rs. 2,586.27 million, Rs. 3,938.30
million and Rs. 5,651.95 million in the succeeding years. But in FY 2001/02 it has
been decreased to Rs. 5,074.23 million. HBL has obviously larger amount of risk-
weighted assets than that of BOK. HBL had risk-weighted assets of Rs. 5,603.31
million in FY 1997/98 which has been increased to Rs. 7,685.27 million, Rs.
10,093.77 million and Rs. 14,956.93 million in succeeding years. But same as BOK,
the risk-weighted assets of HBL has also been decreased by Rs. 12,746.17 in FY
2001/02. The cause for decrease in amount of risk-weighted assets is the new
provisions made by NRB effective from this FY. This is the reason for both banks to
have higher capital adequacy ratio in this FY.
Capital to Deposit Ratio: The capital to deposit ratios of BOK and HBL have been
found unsatisfactory. The capital to deposit ratios of BOK are at around 6% to 9%
till the end of FY 2000/01 which has been increased to 12.79% in FY 2001/02. The
capital to deposit ratios of HBL are in between 5% to 8%. It is accepted worldwide
that an 8% to 10 % capital to deposit ratio is safe. But in Nepal there are no such
norms or standards to regularize this requirement. Still, it can be said that the capital
to deposit ratios that the commercial banks presently maintaining are not sufficient.
CD Ratio: The Credit / Deposit Ratio (CD Ratio) is one of the most important ratios
for commercial banks. This ratio shows how effectively the banks have been using
the fund they collected from depositors. In this regard, BOK seems to be ahead of
HBL. BOK has been maintaining CD Ratio around 66% to 85% whereas HBL has
constant CD ratios between 51% and 55%. The percentage of CD ratio indicates the
percentage of the fund used in credits by the bank. It is learnt that the CD ratios of
BOK is satisfactory and the same of HBL is scant.
Statistical Analysis: The correlation coefficients between capital and deposit and
correlation coefficients between capital and credit of both the banks showed that
they are correlated. All coefficients are more than 0.9 which is near to 1. The
coefficients nearest to 1 show the relationship to be more perfect. Also, the test of
hypothesis proved the existence of their relationship.

69. 60
Impact Analysis: It is observed that both the banks have been complying with the
requirement of the capital adequacy norms of NRB. Both the banks have been
increasing their capital funds to meet the capital adequacy requirement. The officials
of both the banks feel that NRB, as a central bank, should set the capital adequacy
norms. They all agree that these norms are required to safeguard the interest of
depositors. The officials are not quite convinced with the prescribed ratios. Some of
them say that the ratios are reasonable and some say that it is not perfect. However,
the majority opine that these norms are acceptable.
Perception of Depositors: It has been found that majority of the depositors deposit
their money in a bank for security of their money. But they are not seemed to be
aware of the capital fund of the commercial bank where they are depositing their
money. Only 25% of the respondents are aware of the fact of the necessity of
adequate capital to safeguard their money. Also majority of the respondents say that
attractive interest is required to attract deposits to commercial banks. It has been
studied that the depositors in Nepal are not aware of the fact of capital adequacy of a
bank which is necessary to safeguard their deposit.
5.3 Conclusion
Commercial banks of Nepal are bound by the directives of NRB. The directive no. 1
has set norms on capital adequacy for commercial banks. Every commercial bank
has to meet the requirement of capital adequacy as stated by the directive. Capital
adequacy is the portion of capital fund in regard of risk-weighted assets that a
commercial bank holds. Capital adequacy is required to safeguard the money of the
depositors as the banks are playing with the money they collected from the
depositors.
The banks under study, BOK and HBL, are found to be successful to comply with
requirement of capital adequacy norms. Anyhow the banks are meeting the
requirements. However some bank officials are not satisfied with the provisions.

70. 61
The capital-to-deposit ratio of both banks seems to be inadequate. The CD ratio of
HBL is very much low which needs to be improved immediately. The CD ratio of
BOK is satisfactory. Although the banks are successful to meet the capital adequacy
requirement, they seem to be ineffective to fulfill other capital and deposit ratios
which are also very much important in regard of safeguarding the money of the
depositors. The lack of policy in regard of these types of ratios caused to the
relaxation of the banks not to meet the adequate ratios.
The correlation coefficients between capital and deposit and between capital and
credit are found to be positive and near to perfect correlation. The test of hypothesis
revealed that the capital and deposit and correlated. Also, the test brought to light
that capital and credit are also correlated.
The research questionnaire revealed that although the depositors are depositing their
money for safety reason, they are not aware of the fact of necessity of adequate
capital to safeguard their money. It is seemed that they are not attracted by the
capital fund of a bank but the position and status of the bank has been luring them to
deposit their money in any such bank.
5.4 Recommendation
After the thorough study of the research, the following recommendations have been
proposed for consideration by the concerns:
The capital funds of both commercial banks under study are highly depending
upon share capital. It is recommended to the commercial banks to follow optimal
capital structure which maximizes the market value of the firm. The banks
should use some sort of debt financing also depending upon its viability. It is
notable that HBL has already started the debt financing. But still debt financing
is an unaccustomed source of financing for commercial banks in Nepal.
Capital-to-deposit ratios of commercial banks under study are seemed to be less
than what actually required. There is lack of standard on such type of ratio.

71. 62
Therefore, NRB should set appropriate standard for capital-to-deposit ratio to be
maintained by commercial banks. An 8% to 10% ratio is appropriate for the ratio
of capital-to-deposit.
CD ratios of HBL are comparatively less than that of BOK. This showed that
HBL has not been effectively using the funds collected from depositors. It is
recommended to HBL that it should concentrate more on credit and investment.
The bank shall expand its branches in rural areas of Nepal and search investment
opportunities there. BOK too cannot relax with such CD ratios. More credit
flows are required to verge on the optimum CD ratio.
The commercial banks should try to maintain appropriate capital-to-deposit
ratios and CD ratios as stated above. They can no way escape pointing on to the
lack of the policy.
While lending loans and advances, banks should keep in account that the fund
they are going to lend is collected from public and hence should be carefully
treated on behalf of the depositors to protect their interest.
NRB should consult to the various bank officials before setting or resetting
standards on capital adequacy norms. The complaints and criticisms of bank
officials should be considered accordingly. Consequently, an optimal standard
will ensue which will satisfy almost everyone.
It has been found that the depositors are not aware of the fact of the necessity of
adequate capital fund to safeguard their deposits. They deposit their money to
any banks regardless of adequate capital fund which may endanger safety of
their money. Therefore, NRB should initiate awareness programs to make the
depositors aware of such fact and think before depositing money in any
commercial banks.

72. 63
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76. 67
A PPENDIX A
Commercial Bank Statistics on Capital Fund and Deposits
(amount in million)
Name of the Bank Capital Fund Total Deposits
1. Nepal Bank Ltd. 2728.5 36502.4
2. Rastriya Banijya Bank 3581.2 40294.7
3. Nabil Bank Ltd 1464.3 15370.7
4. Nepal Investment Bank Ltd. 514.7 4216.3
5. Standard Chartered Bank Nepal Ltd. 1258.0 15835.7
6. Himalayan Bank Ltd. 927.7 18595.2
7. Nepal SBI Bank Ltd. 619.4 5595.6
8. Nepal Bangladesh Bank Ltd. 547.1 9514.5
9. Everest Bank Ltd. 455.0 5461.0
10. Bank of Kathmandu Ltd. 578.0 5735.9
11. Nepal Credit & Commerce Bank Ltd. 367.0 3709.0
12. Nepal Industrial & Commercial Bank Ltd. 519.5 3165.3
13. Lumbini Bank Ltd. 351.4 2646.1
14. Machhapuchchhre Bank Ltd. 137.3 994.8
15. Kumari Bank Ltd. 350.2 1179.9
16. Laxmi Bank Ltd. 275.0 112.6
Source: Banking & Financial Statistics (2002)

77. 68
A PPENDIX B
Risk-Weightage on On-Balance Sheet Assets
On-Balance Sheet Assets Risk
Weightage %
Cash Balance 0
Gold (tradable) 0
Balance with Nepal Rastra Bank 0
Investment in Govt. Securities 0
Investment in NRB Bonds 0
Fully secured loan against own Fixed Deposit Receipt 0
Fully secured loan against Govt. Securities 0
Balance with domestic banks and financial institutions 20
Fully secured loan against Fixed Deposit Receipt of other banks 20
Balance with foreign banks 20
Money at call 20
Loan against the guarantee of internationally rated*/foreign 20
banks
Other investments with internationally rated*/foreign banks 20
Investments in shares, debentures and bonds 100
Other investments 100
Loan, advances and bills purchased/discounted** 100
Fixed assets 100
All other assets 100
*/ Internationally rated bank having rating of at least A+ by reputed Rating
Agency or Banks specified as First Class Bank by Nepal Rastra Bank from
time to time.
** Except Loan and Advances provided against Fixed Deposit Receipt and
Government Securities.

78. 69
A PPENDIX C
Risk-Weightage on Off-Balance Sheet Items
Off-Balance Sheet Assets Risk
Weightage %
Bills collection 0
Forward foreign exchange contract 10
L/Cs with maturity of less than 6 months (full value) 20
Guarantees provided against counter guarantee of internationally 20
rated*/foreign banks
L/Cs with maturity of more than 6 months (full value) 50
Bid bond 50
Performance bond 50
Advance payment guarantee 100
Financial guarantee 100
Other guarantee 100
Irrevocable loan commitment 100
Contingent liability in respect of Income Tax 100
All other contingent liabilities 100
*/ Internationally rated bank having rating of at least A+ by reputed Rating
Agency or Banks specified as First Class Bank by Nepal Rastra Bank from
time to time.

79. 70
A PPENDIX D
Directives Form No. 1
Table of Capital Fund
Previous Current
Particulars
Quarter Quarter
A) Core Capital
1) Paid-up Capital
2) Share Premium
3) Non-redeemable Preference Shares
4) General Reserve Fund
5) Cumulative Profit/Loss (up to previous FY)
6) Current Year Profit & Loss (as per Balance Sheet)
B) Supplementary Capital
1) Loan Loss Provision
2) Exchange Equalization Reserve
3) Assets Revaluation Reserve
4) Hybrid Capital Instruments
5) Unsecured Subordinated Term Debt
6) Interest Rate Fluctuation Fund
7) Other Free Reserves
C) Total Capital Fund (A + B)
D) Minimum Capital Fund required to be maintained
on the basis of Risk Weighted Assets
Capital Fund (by ………… Percent)
Core Capital (by ………… Percent)
Capital Fund (excess/short) (by ………… Percent)
Core Capital (excess/short) (by ………… Percent)

80. 71
A PPENDIX E
Directives Form No. 2
Statement Table of Risk Weighted Assets
Previous Quarter Current Quarter
Risk
Risk Weighted Risk Weighted
Weightage Amount Amount
On-Balance Sheet Assets Assets Assets
Cash Balance
Gold (tradable)
Balance with Nepal Rastra Bank
Investment in Govt. Securities
Investment in NRB Bond
Fully secured Fixed Deposit Receipt Loan against
own Fixed Deposit Receipt
Fully secured loan against Govt. Securities
Balance with domestic banks and financial institutions
Fully secured Fixed Deposit Receipt Loan against
Fixed Deposit Receipt of other banks
Balance with foreign banks
Money at call
Loan against guarantee of internationally rated banks
Other investments with internationally rated banks
Investment in Share, Debentures and Bonds
Other investments
Loan, Advances and Bills purchased/discounted
Fixed assets
All other assets
(A) Total
Off-Balance Sheet Items
Bills Collection
Forward foreign exchange contract
L/Cs with maturity of less than 6 months (full value)
Guarantees provided against counter guarantee of
internationally rated*/foreign banks
L/Cs with maturity of more than 6 months (full value)
Bid bond
Performance bond
Advance payment guarantee
Financial guarantee
Other guarantee
Irrevocable loan commitment
Contingent liability in respect of Income Tax
All other contingent liabilities
(B) Total
Total Risk Weighted Assets

81. 72
A PPENDIX F
Calculation of Capital Adequacy Ratios of BOK:
(Rs. in million)
Total Capital Risk-weighted
Core Capital
Fiscal Year Fund Assets
1997/98 169.94 92.07 1551.96
1998/99 171.47 95.92 2586.27
1999/00 351.69 249.36 3938.30
2000/01 486.06 318.70 5651.95
2001/02 731.90 511.50 5074.23
We have;
Ratio of Total Capital Fund as:
Total Capital Fund
TRWA
× 100%
Ratio of Core Capital Fund as:
Core Capital
TRWA
× 100%
where, TRWA = Total Risk-weighted Assets
By using above formulas we get the ratios as:
Fiscal Year Total Capital Fund Core Capital
1997/1998 10.95 % 5.93 %
1998/1999 6.63 % 3.71 %
1999/2000 8.93 % 6.33 %
2000/2001 8.60 % 5.64 %
2001/2002 14.42 % 10.08 %

82. 73
Calculation of Capital Adequacy Ratios of HBL:
(Rs. in million)
Total Capital Risk-weighted
Core Capital
Fiscal Year Fund Assets
1997/98 491.41 298.87 5603.31
1998/99 647.10 388.79 7685.27
1999/00 810.53 448.08 10093.77
2000/01 1,198.27 698.70 14956.93
2001/02 1,472.97 834.55 12746.17
We have;
Ratio of Total Capital Fund as:
Total Capital Fund
TRWA
× 100%
Ratio of Core Capital Fund as:
Core Capital
TRWA
× 100%
where, TRWA = Total Risk-weighted Assets
By using above formulas we get the ratios as:
Fiscal Year Total Capital Fund Core Capital
1997/1998 8.77 % 5.33 %
1998/1999 8.42 % 5.06 %
1999/2000 8.03 % 4.44 %
2000/2001 8.01 % 4.67 %
2001/2002 11.56 % 6.55 %

83. 74
A PPENDIX G
Calculation of Ratio of Capital to Deposit:
(Rs. in million)
BOK HBL
Fiscal Year
Total Capital Total Capital
Deposit Deposit
Fund Fund
1997/98 169.94 1,773.87 491.41 7,713.60
1998/99 171.47 2,564.83 647.10 9,772.74
1999/00 351.69 4,196.41 810.53 14,043.10
2000/01 486.06 5,713.49 1,198.27 17,636.85
2001/02 731.90 5,723.30 1,472.97 18,619.38
We have;
Ratio of Capita to Deposit as:
Total capital fund
Total deposit collected
× 100%
At the end of Fiscal Year BOK HBL
1997/98 9.58 % 6.37 %
1998/99 6.69 % 6.62 %
1999/00 8.38 % 5.77 %
2000/01 8.51 % 6.79 %
2001/02 12.79 % 7.91 %

84. 75
A PPENDIX H
Calculation of Credit / Deposit Ratio:
(Rs. in million)
BOK HBL
Fiscal Year
Credit Deposit Credit Deposit
1997/98 1,177.87 1,773.87 4,223.07 7,713.60
1998/99 1,863.40 2,564.83 5,245.98 9,772.74
1999/00 3,087.63 4,196.41 7,224.73 14,043.10
2000/01 4,285.93 5,713.49 9,015.35 17,636.85
2001/02 4,890.07 5,723.30 9,557.14 18,619.38
We have;
Ratio of Capita to Deposit as:
Total capital fund
Total deposit collected
× 100%
At the end of Fiscal Year BOK HBL
1997/98 66.40 % 54.75 %
1998/99 72.65 % 53.68 %
1999/00 73.58 % 51.45 %
2000/01 75.01 % 51.12 %
2001/02 85.44 % 51.33 %

85. 76
A PPENDIX I-1
Calculation of Correlation Co-efficient of Deposit on Capital of BOK:
Capital Deposit
Fiscal Year (Rs. in million) (Rs. in million)
1997/98 169.94 1,773.87
1998/99 171.47 2,564.83
1999/00 351.69 4,196.41
2000/01 486.06 5,713.49
2001/02 731.90 5,723.30
Let the variables Capital be X and Deposit be Y
X Y x= (X-¯ ) y= (Y-¯ )
X Y xy x2 y2
169.94 1773.87 -212.27 -2220.51 471352.10 45059.40 4930664.66
171.47 2564.83 -210.74 -1429.55 301266.23 44412.19 2043613.20
351.69 4196.41 -30.52 202.03 -6166.36 931.59 40816.12
486.06 5713.49 103.85 1719.11 178526.14 10784.41 2955339.19
731.90 5723.30 349.69 1728.92 604582.58 122281.70 2989164.37
Σ= 1911.06 19971.90 - - 1549560.68 223469.29 12959597.54
ΣX 1911.06
X
¯= = = 382.21
N 5
ΣY 19971.90
Y
¯= = = 3994.38
N 5
Now,
Σxy
r=
√Σx2. √Σy2
1549560.68 1549560.68
= = = 0.911
√223469.29. √12959597.54 472.73 × 3559.94
∴Correlation co-efficient of Deposit on Capital of BOK, r1 = 0.911

86. 77
A PPENDIX I-2
Calculation of Correlation Co-efficient of Deposit on Capital of HBL:
Capital Deposit
Fiscal Year (Rs. in million) (Rs. in million)
1997/98 491.41 7,713.60
1998/99 647.10 9,772.74
1999/00 810.53 14,043.10
2000/01 1,198.27 17,636.85
2001/02 1,472.97 18,619.38
Let the variables Capital be X and Deposit be Y
X Y x= (X-¯ ) y= (Y-¯ )
X Y xy x2 y2
491.41 7713.60 -432.65 -5843.53 2528181.61 187182.56 34146889.61
647.10 9772.74 -276.96 -3784.39 1048110.62 76704.63 14321637.95
810.53 14043.10 -113.53 485.97 -55169.78 12888.15 236162.95
1198.27 17636.85 274.21 4079.72 1118715.24 75193.32 16644082.64
1472.97 18619.38 548.91 5062.25 2778737.70 301306.58 25626334.56
Σ= 4620.28 67785.67 - - 7418575.40 653275.24 90975107.71
ΣX 4620.28
X
¯= = = 924.06
N 5
ΣY 67785.67
Y
¯= = = 13557.13
N 5
Now,
Σxy
r=
√Σx2. √Σy2
7418575.40 7418575.40
= = = 0.962
√653275.24. √90975107.71 808.25 × 9538.09
∴Correlation co-efficient of Deposit on Capital of HBL, r2 = 0.962

87. 78
A PPENDIX I-3
Calculation of Correlation Co-efficient of Credit on Capital of BOK:
Capital Credit
Fiscal Year (Rs. in million) (Rs. in million)
1997/98 169.94 1,177.87
1998/99 171.47 1,863.40
1999/00 351.69 3,087.63
2000/01 486.06 4,285.93
2001/02 731.90 4,890.07
Let the variables Capital be X and Credit be Y
X Y x= (X-¯ ) y= (Y-¯ )
X Y xy x2 y2
169.94 1177.87 -212.27 -1883.11 399731.53 45059.40 3546103.27
171.47 1863.40 -210.74 -1197.58 252380.40 44412.19 1434197.86
351.69 3087.63 -30.52 26.65 -813.41 931.59 710.22
486.06 4285.93 103.85 1224.95 127208.61 10784.41 1500502.50
731.90 4890.07 349.69 1829.09 639610.82 122281.70 3345570.23
Σ= 1911.06 15304.90 - - 1418117.95 223469.29 9827084.08
ΣX 1911.06
X
¯= = = 382.21
N 5
ΣY 15304.90
Y
¯= = = 3060.98
N 5
Now,
Σxy
r=
√Σx2. √Σy2
1418117.95 7418575.40
= = = 0.957
√223469.29. √9827084.08 472.73 × 3134.82
∴Correlation co-efficient of Credit on Capital of BOK, r3 = 0.962

88. 79
A PPENDIX I-4
Calculation of Correlation Co-efficient of Credit on Capital of HBL:
Capital Credit
Fiscal Year (Rs. in million) (Rs. in million)
1997/98 491.41 4,223.07
1998/99 647.10 5,245.98
1999/00 810.53 7,224.73
2000/01 1,198.27 9,015.35
2001/02 1,472.97 9,557.14
Let the variables Capital be X and Credit be Y
X Y x= (X-¯ ) y= (Y-¯ )
X Y xy x2 y2
491.41 4223.07 -432.65 -2830.18 1224467.79 187182.56 8009941.47
647.10 5245.98 -276.96 -1807.27 500535.38 76704.63 3266239.31
810.53 7224.73 -113.53 171.48 -19466.98 12888.15 29404.02
1198.27 9015.35 274.21 1962.10 538034.19 75193.32 3849820.71
1472.97 9557.14 548.91 2503.89 1374418.08 301306.58 6269445.10
Σ= 4620.28 35266.27 - - 3617988.45 653275.24 21424850.62
ΣX 4620.28
X
¯= = = 924.06
N 5
ΣY 35266.27
Y
¯= = = 7053.25
N 5
Now,
Σxy
r=
√Σx2. √Σy2
3617988.45 7418575.40
= = = 0.967
√653275.24. √21424850.62 808.25 × 4628.70
∴Correlation co-efficient of Credit on Capital of HBL, r3 = 0.962

89. 80
A PPENDIX J-1
Test of Hypothesis 1
For Capital and Deposit of BOK, we have;
Null Hypothesis: Capital and deposit of BOK are not correlated.
Alternate Hypothesis: Capital and deposit of BOK are correlated.
Number of observations (n) = 5
Correlation (r) = 0.911
H0 : ρ=0, i.e., Capital and deposit of BOK are not correlated.
H1 : ρ≠0 (two-tailed), i.e., Capital and deposit of BOK are correlated.
Level of Significance (α) = 5% = 0.05
Test Statistics under null hypothesis is
r×√n-2
t=
√1-r2
0.911×√5-2 0.911×√3 0.911×1.732
t= = = = 3.827
√1-0.9112 √0.17 0.412
Degree of freedom (d.f.) = n-2 = 5-2 = 3
Table Value, at 5% level of significance and at degree of freedom at 3:
t0.05 = 3.18
tcal = 3.827 > t0.05 = 3.18
Since calculated t is greater than the table value, H0 is rejected. Thus, it is concluded
that capital and deposit of BOK are correlated.

90. 81
A PPENDIX J-2
Test of Hypothesis 2
For Capital and Deposit of HBL, we have;
Null Hypothesis: Capital and deposit of HBL are not correlated.
Alternate Hypothesis: Capital and deposit of HBL are correlated.
Number of observations (n) = 5
Correlation (r) = 0.962
H0 : ρ=0, i.e., Capital and deposit of HBL are not correlated.
H1 : ρ≠0 (two-tailed), i.e., Capital and deposit of HBL are correlated.
Level of Significance (α) = 5% = 0.05
Test Statistics under null hypothesis is
r×√n-2
t=
√1-r2
0.962×√5-2 0.962×√3 0.962×1.732
t= = = = 6.102
√1-0.9622 √0.075 0.273
Degree of freedom (d.f.) = n-2 = 5-2 = 3
Table Value, at 5% level of significance and at degree of freedom at 3:
t0.05 = 3.18
tcal = 6.102 > t0.05 = 3.18
Since calculated t is greater than the table value, H0 is rejected. Thus, it is concluded
that capital and deposit of HBL are correlated.

91. 82
A PPENDIX J-3
Test of Hypothesis 3
For Capital and Credit of BOK, we have;
Null Hypothesis: Capital and credit of BOK are not correlated.
Alternate Hypothesis: Capital and credit of BOK are correlated.
Number of observations (n) = 5
Correlation (r) = 0.957
H0 : ρ=0, i.e., Capital and credit of BOK are not correlated.
H1 : ρ≠0 (two-tailed), i.e., Capital and credit of BOK are correlated.
Level of Significance (α) = 5% = 0.05
Test Statistics under null hypothesis is
r×√n-2
t=
√1-r2
0.957×√5-2 0.957×√3 0.957×1.732
t= = = = 5.714
√1-0.9572 √0.084 0.290
Degree of freedom (d.f.) = n-2 = 5-2 = 3
Table Value, at 5% level of significance and at degree of freedom at 3:
t0.05 = 3.18
tcal = 5.714 > t0.05 = 3.18
Since calculated t is greater than the table value, H0 is rejected. Thus, it is concluded
that capital and deposit of HBL are correlated.

92. 83
A PPENDIX J-4
Test of Hypothesis 4
For Capital and Credit of HBL, we have;
Null Hypothesis: Capital and credit of HBL are not correlated.
Alternate Hypothesis: Capital and credit of HBL are correlated.
Number of observations (n) = 5
Correlation (r) = 0.967
H0 : ρ=0, i.e., Capital and credit of HBL are not correlated.
H1 : ρ≠0 (two-tailed), i.e., Capital and credit of HBL are correlated.
Level of Significance (α) = 5% = 0.05
Test Statistics under null hypothesis is
r×√n-2
t=
√1-r2
0.967×√5-2 0.967×√3 0.967×1.732
t= = = = 6.574
√1-0.9672 √0.065 0.255
Degree of freedom (d.f.) = n-2 = 5-2 = 3
Table Value, at 5% level of significance and at degree of freedom at 3:
t0.05 = 3.18
tcal = 6.574 > t0.05 = 3.18
Since calculated t is greater than the table value, H0 is rejected. Thus, it is concluded
that capital and deposit of HBL are related.

93. 84
A PPENDIX K
Tribhuvan University
Faculty of Management
Shanker Dev Campus
Putalisadak, Kathmandu
Study on “Nepal Rastra Bank – Capital Adequacy Norms for Commercial Banks
and its impact: Case Study of Bank of Kathmandu Ltd and Himalayan Bank Ltd.”
INTERVIEW QUESTIONNAIRE FOR BANK OFFICIALS
1) Nepal Rastra Bank has prescribed capital adequacy ratio in its directive no. 1 for
commercial banks. Do you think it is necessary that a central bank should issue
Capital Adequacy norms for commercial banks?
Yes No
2) Which stakeholders’ interest will be safeguarded most by an adequate capital fund?
Depositors’ interest Shareholders’ interest
Employees’ interest Others ___________________________
3) Do you think the present capital adequacy ratio i.e., 9% for FY 2058/59, 10% for FY
2059/60 and 12% from FY 2060/61 onwards; prescribed by Nepal Rastra Bank is
justified?
Yes, it is perfect No, it is high No, it is not adequate
4) Do you think the change in capital adequacy ratio as stated above is necessary in the
present context?
Yes, it is necessary Not at all
5) The capital adequacy ratio is based on risk-weighted assets. Do you think the
weightage prescribed by NRB on the on- and off-balance sheet items are
appropriate?
Yes, it is perfect Just OK No, it should be revised
6) In your opinion, which of the following steps is appropriate for your bank to follow
to cope with the above changes in capital adequacy ratio?
We can increase core capital.
We can increase supplementary capital.
We can increase both components of capital.
It is not necessary to increase capital for us, it is adequate.
Name of Interviewee:
Designation

94. 85
A PPENDIX K-1
Analysis of Interview Questionnaire for Bank Officials:
Question No. 1 No. of Responses Percentage
a) Yes 12 100 %
b) No 0 -
Question No. 2 No. of Responses Percentage
a) Depositors’ interest 12 100 %
b) Shareholders’ interest 0 -
c) Employees’ interest 0 -
d) Others 0 -
Question No. 3 No. of Responses Percentage
a) Yes, it is perfect 7 58.33 %
b) No, it is high 5 41.67 %
c) No, it is not adequate 0 -
Question No. 4 No. of Responses Percentage
a) Yes, it is necessary 7 58.33 %
b) Not at all 5 41.67 %

95. 86
Question No. 5 No. of Responses Percentage
a) Yes, it is perfect 0 -
b) Just OK 7 58.33 %
c) No, it should be revised 5 41.67 %
No. of No. of
Question No. 6 Responses Percentage Responses Percentage
for present for future
a) We can increase core capital. 0 - 0 -
b) We can increase
0 - 0 -
supplementary capital.
c) We can increase both
6 50 % 12 100 %
components of capital.
d) It is not necessary to increase
6 50 % 0 -
capital for us, it is adequate.

96. 87
A PPENDIX L
Tribhuvan University
Faculty of Management
Shanker Dev Campus
Putalisadak, Kathmandu
Study on “Nepal Rastra Bank – Capital Adequacy Norms for Commercial Banks
and its impact: Case Study of Bank of Kathmandu Ltd and Himalayan Bank Ltd.”
QUESTIONNAIRE FOR BANK ACCOUNT HOLDERS
I would be most grateful if you could spare 5 minutes to answer this questionnaire.
Tick one box per question, unless otherwise indicated.
1) Why do you deposit your money in a bank?
For Security of Money For Interest Earning
For Social Status For Official Purpose
Others (please specify) …………………………………………………
2) Which aspect of the bank do you think is the most important one to make a
depositor’s money safe?
Physical Security Arrangements Capital Fund
Status Profitability
Others (please specify) …………………………………………………
3) What do you think a bank should do in order to attract more deposits?
Arrange the proper security Maintain the adequate capital fund
Achieve a good profit Pay an attractive interest rate
Others (please specify) …………………………………………………
Name:
Address:
Email:
Occupation:
Education:
Thank you for taking the time to complete this questionnaire.
Manoj Dumaru Shrestha
MBS Student
Tribhuvan University, Shanker Dev Campus
Putalisadak, Kathmandu

97. 88
A PPENDIX L-1
Analysis of Questionnaire for Bank Account Holders:
Question No. 1 No. of Responses Percentage
a) For Security of Money 42 58.33 %
b) For Interest Earning 16 22.22 %
c) For Social Status 2 2.78 %
d) For Official Purpose 7 9.72 %
e) Others 5 6.94 %
Question No. 2 No. of Responses Percentage
a) Physical Security Arrangements 30 41.67 %
b) Capital Fund 18 25.00 %
c) Status 9 12.50 %
d) Profitability 15 20.83 %
e) Others 0 -
Question No. 3 No. of Responses Percentage
a) Arrange the proper security 13 18.06 %
b) Maintain the adequate capital fund 9 12.50 %
c) Achieve a good profit 11 15.28 %
d) Pay an attractive interest rate 33 45.83 %
e) Others 6 8.33 %

98. 89
B IO D ATA
Manoj Dumaru Shrestha
Personal Details
Date of Birth: December 27, 1977 (Poush 12, 2034 BS)
Marital Status: Sin gle
Sex: Male
Nationality: Nepali
Address: Ikhapokhari Marg – 30, Kshetrapati, Kathmandu, Nepal
Contact Phone No.: (R): 4253800; (O): 4227749 Ext -124
E-mail Address: manojds@hotmail.com
Postal Address: P.O. Box: 20590, Kathmandu, Nepal
Academic Qualifications
Master’s Degree in Business Studies (MBS) 2001 – 2003
Major subjects: Investment, Capital Structure & Financial Management
First Division
Tribhuvan University, Shanker Dev Campus
Putalisadak, Kathmandu
Bachelor’s Degree in Business Studies (BBS) 1996 – 1999
Second Division
Tribhuvan University, Public Youth Campus
Dhobichour, Kathmandu
Proficiency Certificate in Business Administration 1993 – 1995
Second Division
Tribhuvan University, People’s Campus
Pakanajol, Kathmandu
School Leaving Certificate (SLC) 1993
First Division
HMG/N Board, Vishwa Niketan High School
Tripureshwar, Kathmandu
Work Experience
Himalayan Bank Limited July 1997 onwards
Head Office & Main Branch, Tridevi Marg, Thamel, Kathmandu
Resume of Manoj Dumaru Shrestha Page 1 of 2

99. 90
Languages Known
Written Spoken
Nepali Very Good Very Good
English Very Good Good
Newari Good Mother Tongue
Trainings
Advanced Level Training on Accounting June 16 – Aug 8, 2003
MAC Consultants (P) Ltd, Kathmandu
Beginners Level Training on Practical Accounting Feb 10 – May 2, 2003
MAC Consultants (P) Ltd, Kathmandu
Training Program on International Banking June 2001
Conducted by Himalayan Bank Limited
Inventory Management Training Program December 1999
Management Association of Nepal, Kathmandu
Comprehensive Banking Course August – September 1997
Conducted by Himalayan Bank Limited
Computer Course January – April 1997
(MS-Windows, MS-Word & MS-Excel)
Wit Computer Center, Kathmandu
Skills
Excellent commanding in MS-Word, MS-Excel, MS-PowerPoint, Adobe PageMaker
& Adobe Photoshop
Good knowledge of graphic designing and spreadsheet environments
Basic knowledge of desktop publishing
Typing fluency in English and Nepali
Extra Curricular Activities
• Member of editorial board of Info Himalayan – bimonthly newsletter of Himalayan
Bank Ltd.
Resume of Manoj Dumaru Shrestha Page 2 of 2