CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

Preparation and Presentation of Financial Statements

of Banks and Financial Institutions
REFERENCES FOR NOTE:
- ICAN’S CAPII STUDY MATERIAL
- NRB DIRECTIVES 2077
- MONETARY POLICY 2077/78
- MAJOR FINANCIAL INDICATORS AS ON BAISHAKH END,2078
-PREPARED BY KISAN JOSHI

1. CAPITAL OF THE BANKS AND FINANCIAL INSTITUTION

The NRB has issued directives for minimum capital. Unified Directives 2077 states that the
bank and financial institution which are licensed to operate financial transactions shall maintain
the following minimum paid up capital.

5
10 Districts Districts
Class National Regional within 3
Level Level within
Region 3
Regio
n
A Rs.800 crores
B Rs.250 crores Rs.120 crores Rs.50 crores
C Rs.80 crores Rs.80 crores Rs.40 crores
D Rs.10 crores Rs.2 crores

2. DISCOUNTING AND COLLECTION OF BILLS

Out of the funded function one of the major functions is to discount the bills. If a bank
purchases a bill (Cheque, draft, documentary credit etc.) or other instrument, the bill amounts
less discount charges is immediately credited to the customer account, discount charge is
credited to “Discount Account” and bill amount is debited to the “Discounted Bills Account”.
This is an asset and once the amount of the bills is collected from the drawee of the bill, the
“Discounted Bills Account” is credited.

Similarly, one of the major non funded functions of the bank is to accept bills for collection.
Bills for Collection refers to the simply collection of bills (cheque, draft, documentary credit
etc.) or other instrument for customer and the bill amount is paid to customer once is received
from the drawee. Initially the transaction does not require the movement of funds so it does not
require any book entry until the bill is collected but particulars of the bills is recorded in a
special book called “Bills for Collection Register”
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

Format for Bills for Collection

Bills for collection (Assets) a/c

Particulars Amount(Rs) Particulars Amount (Rs)
To balance b/d xxx By bills for xxx
To bills received xxx collection(dishonor)
collected(Liabilities) (Liabilities)
By bills (Liabilities) xxx
By balance c/d xxx
Total xxx Total Xxx

Bills for collection (Liabilities) a/c

Particulars Amount(Rs) Particulars Amount (Rs)
By bills for xxx To balance b/d Xxx
collection(dishonor)
(Assets) To bills received xxx
By bills collected (Assets) xxx collected(Assets)
By balance c/d
xxx
Total xxx Total Xxx

Illustration 1: Following facts have been extracted from the record of Adarsha Bank Ltd.
in respect of the year ending Ashadh 32, 2069:

On 1-4-2068 Bills for collection were Rs. 900,000. During 2068/069 bill received for collection
amounted to Rs. 5,400,000, bills collected were Rs. 4,900,000 and bills dishonoured and
returned were Rs. 750,000.

Required:
Prepare Bills for Collection (Assets) A/C and Bills for Collection (Liability) A/C.

Solution:
Bills for Collection (Assets) A/c
Date Particulars Rs. Date Particulars Rs.
By Bills
1/4/2068 To balance b/d 900,000 2068/69 collected 4,900,000
(Liabilities)
To Bills for A/c
2068/69 collection 5,400,000 By Bills for 750,000
( Liabilities) A/c collection
32/3/2069
(Liabilities)
A/c
By Balance c/d 650,000
6,300,000 6,300,000
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

Bills for Collection (Liabilities) A/c

Date Particulars Rs. Date Particulars Rs.
2068/69 To Bills
collected 4,900,000 1/4/2068 By Balance b/d 900,000
(Assets) A/c
32/3/2069 By Bills for
To Bills for collection (Assets)
collection 750,000 2068/69 5,400,000
A/c
(Assets) A/c
650,000
To Balance c/d
6,300,000 6,300,000

3. REBATE ON BILLS DISCOUNTED

When a bank discounts a bill of exchange, the full amount of the discount earned is credited to
the Discount Account but some of the bills discounted may not mature for payment by the close
of the year; as a result,' the amount of discount in respect of such bills would not have been
earned during the year. On this consideration, the unexpired portion of such discount is carried
forward to next accounting period by debiting the Discount Account and crediting the Rebate on
Bills Discounted Account.
The later account is shown on the liabilities side of the Balance Sheet as income received but not
accrued before the close of the year. At the commencement of the period next following, the
account is closed off by transferring the amount to the Discount Account.
Illustration 2: The following is an extract from the Trial Balance of Krishi Bikas Bank Ltd.
as at 31st March, 2011:
Rebate on bills discounted as on 1-4-2010 341,295 (Cr.)
Discount received 850,780 (Cr.)
Analysis of the bills discounted reveals as follows:
Amount (Rs.) Due date
14,00,000 June 1,2011
43,60,000 June 8,2011
28,20,000 June 21,2011
40,60,000 July 1,2011
30,00,000 July 5,2011

You are required to find out the amount of discount to be credited to Profit and Loss account
for the year ending 31st March, 2011 and pass Journal Entries. The rate of discount may be
taken at 10% per annum.

Solution:
The amount of rebate on bills discounted as on 31st March, 2011 the period which has not
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE
been expired up to that day will be calculated as follows:

Discount on Rs.14,00,000 for 62 days @ 10% 23780

Discount on Rs.43,60,000 for 69 days @ 10% 82,420
Discount on Rs.28,20,000 for 82 days @ 10% 63,355
Discount on Rs.40,60,000 for 92 days @ 10% 102,335
Discount on Rs.30,00,000 for 96 days @ 10% 78,905
Total 350,795

The amount of discount to be credited to the profit and loss account

will be:
Rs.
Transfer from rebate on bills discounted as on 31.03.2010 341,295
Add: Discount received during the year 850,780
1,192,075
Less: Rebate on bills discounted as on 31.03.2011 (as above) 350,795
841,280

Journal Entries
Rs. Rs.
Rebate on bills discounted A/c Dr. 341,295
To Discount on bills A/c 341,295
(Transfer of unexpired discount on 31.03.2010)

Discount on bills A/c Dr. 350,795

To Rebate on bills discounted 350,795
(Unexpired discount on 31.03.2011 taken into account)

Discount on Bills A/c Dr. 841,280

To P & L A/c 841,280
(Discount earned in the year, transferred to P&L A/c)

4. CAPITAL ADEQUACY NORMS

Capital Adequacy norms measures whether the Bank and Financial Institutions hold the sound
and adequate capital or not. Sound Capital represents the quality of the capital whereas
adequacy of Capital represents quantity of the capital. Sound and adequate capital provides long
term solvency to the Bank and Financial Institution and provide sufficient capital to lend.
Inadequate capital leads the Bank and Financial Institution into Solvency problem.

Core Capital/Primary Capital (Tier I Capital)

Directive 1 of Unified Directives 2077 on “Provisions relating to Capital Adequacy” states that
the amount in the following heads shall be included/calculated in the core capital: -

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

Common Equity Tier 1 (CET 1)
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE
A Paid up Equity Share Capital
B Equity Share Premium
c. Proposed Bonus Equity Shares
D Statutory General Reserves
E Retained Earnings
F Un-audited current year cumulative profit/(Loss)
G Capital Redemption Reserve
H Capital Adjustment Fund
I Dividend Equalization Reserves
- Dividend Equalization reserve is a distributable reserve which is
specifically set up to ensure that dividends remain stable for
despite being changes in earnings. Dividend equalization reserve is a
specific reserve.
J Bargain purchase gain
- Bargain purchases involve buying assets for less than fair market
value. An acquirer must record the difference between the purchase price
and fair value as a gain on the balance sheet as negative goodwill. The
difference in the price paid and fair value is recorded as a gain
k. Other Free Reserve
l. Less: Goodwill
m. Less: Intangible Assets
n. Less: Deferred Tax Assets
o. Less: Fictitious Assets(other than research & development &
software)
p. Less: Investment in equity in licensed Financial Institutions
q. Less: Investment in equity of institutions with financial interests
r. Less: Investment in equity of institutions in excess of limits
s. Less: Investments arising out of underwriting commitments
t. Less: Reciprocal crossholdings
- Reciprocal cross holding means a holding by an institution of the
own funds instruments or other capital instruments issued by financial
sector entities where those entities also hold own funds instruments
issued by the institution
u. Less: Purchase of land & building in excess of limit & unutilized
v. Less: Cash Flow Hedge
- A cash flow hedge is an investment position taken by a company or an
investor aiming to offset the potential impact of a particular risk on the
cash flows ..
w. Less: Defined Benefit Pension Assets
- A defined benefit pension (also called a 'final salary' pension) is a type of
workplace pension that pays you a retirement income based on your
salary and the number of years you've worked for the employer, rather
than the amount of money you've contributed to the pension.
x. Less: Un recognized Defined Benefit Pension Liabilities
y. Less: Negative balance of reserve accounts
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE
z. Less: Other Deductions
Adjustments under Pillar II
- Less: Shortfall in Provision (6.4 a 1)
- Less: Loans and Facilities extended to Related Parties and
Restricted lending (6.4 a 2)
Additional Tier 1 (AT1)
a. Perpetual Non-Cumulative Preference Share Capital
b. Perpetual Debt Instruments
c. Stock Premium

Supplementary capital

Supplementary Capital (Tier II)

a. Cumulative and/or Redeemable Preference Share
b. Subordinated Term Debt
The debt instrument having maturity period of more than 5 years &
issued without any collateral with a condition of getting payment after
depositors.
c. Hybrid Capital Instruments
- The securities which are unsecured, fully paid up and subordinated
to the priority order of payment to depositors and creditors and are
available for absorption of losses.
- Instruments issued on the condition that they are not redeemable at
the option of holder except approval of NRB.
d. General loan loss provision
- Only the amount made as provision for pass loan has to be included
in this heading.
- If loan loss provision is maintained more than required, then such
excess provision of loan can also included.
- Provided that, the total amount under this heading shall not be
allowed to be included in supplementary capital so that it will exceed
1.25 % of total risk weighted Assets.
e. Exchange Equalization Reserve
f. Investment Adjustment Reserve
g. Assets Revaluation Reserve
- The amount in this fund or 2 % of Total supplementary Capital
whichever is lower shall be included in this fund.
h. Other Reserves

Current
Risk Weighted Exposures
Period
A Risk Weighted Exposure for Credit Risk
B Risk Weighted Exposure for Operational Risk
C Risk Weighted Exposure for Market Risk
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE
Total Risk Weighted Exposures (a +b +c)
Adjustments under Pillar II
Add: 3% of the total RWE due to noncompliance to Disclosure
Requirement (6.4 a 10)
Add: ... % of the total deposit due to insufficient Liquid
Assets(6.4 a 6)

A class bank shall follow new capital adequacy frameworks 2015 which is based on Basel
III and bank B and C Class shall follow capital adequacy frameworks 2007 (updated in 2008)
which is based on Basel II and D class bank shall follow unified directive 2077 for D class
bank.

The capital fund ratio has to be determined as follows:

Tier 1 Capital Ratio = Eligible Tier 1 Capital

Total Risk Weighted Exposure
Total Capital Ratio = Eligible Total Capital
(CAR) Total Risk Weighted Exposure

Total Risk Weighted Exposure = Credit Risk RWE + Market Risk RWE+ Operational
Risk RWE + Supervisory Adjustment under Pillar II

RWE= Risk weighted Exposure; CAR=Capital Adequacy

Ratio
Total Capital = Tier 1 Capital plus Tier 2 Capital
Based on its risk-weight assets, a licensed institution shall have to maintain the following
Capital Adequacy Ratio (As per MAJOR FINANCIAL INDICATORS AS ON BAISHAKH
END,2078): -

Required Capital Fund on the basis of

Institutions weighted risk
assets (in percentage)
Core Capital Capital Fund
"A" Class 10.86% 13.52%
"B" Class 11.72.0% 13.170%
"C" Class 19.0% 21.09.0%
 CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

5. Risk Weighted Exposure

1. Credit Risk

Particulars
Book Speci fic Eligble Net Risk Risk
Valu e Provi sion CRM Val ue Weight Weighted
Exposures

a b c d= e f=d*e
Cash Balance 0%
Balance With Nepal Rastra Bank 0%
Gold 0%
Investment in Nepalese Government 0%
Securities
All Claims on Government of Nepal 0%
Investment in Nepal Rastra Bank 0%
securities
All claims on Nepal Rastra Bank 0%
Claims on Other Multilateral 100%
Development Banks
Claims on domestic banks that meet 20%
capital adequacy
Claims on domestic banks that do not 100%
meet capital adequacy
Claims on foreign bank incorporated in 20%
SAARC region
Claims on Domestic 100%
Corporates
Claims fulfilling all criterion of regularity 100%
retail except
Claims secured by residential properties 60%
Claims not fully secured by residential 150%
properties
Claims secured by residential properties 100%
(Overdue)
Claims secured by Commercial real estate 100%
Past due claims (except for claims secured 150%
by residential
High Risk claims 150%
Lending Against Securities (Bonds & 100%
Shares)
Investments in equity and other capital 100%
instruments of
Investments in equity and other capital 150%
instruments of
Staff loan secured by residential 60%
property
Interest Receivable/claim on government 0%
 CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE
securities
Cash in transit and other cash items in the 20%
process of
Other ts (as per attachment) 100%
Ass
TOTAL (A)
Off Balance Sheet Exposures Risk Risk
Book Speci fic Eligible Net Weight Weighted
Valu Provision CR Val Exposures
Revocable Commitments 0%
Bills Under Collection 0%
Forward Exchange Contract Liabilities 10%
LC Commitments With Original Maturity 20%
Up to 6 months
Underwriting commitments 50%
Lending of Bank's Securities or Posting of 100%
Securities as
Repurchase Agreements, Assets sale with 100%
recourse
Advance Payment Guarantee 100%
Financial Guarantee 100%
Acceptances and Endorsements 100%
Unpaid portion of Partly paid shares and 100%
Securities
Irrevocable Credit commitments (short 20%
term)
Irrevocable Credit commitments (long 50%
term)
Claims on foreign bank incorporated in 20%
SAARC region
Other Contingent Liabilities 100%
Unpaid Guarantee Claims 200 %
- -
TOTAL (B)
Total RWE for credit Risk Before
Adjustment (A) +(B)
Adjustments under Pillar II
Add: 10% of the loa
n and facilities in excess of -
Single Obligor Limits
Add: 1% of the contract(sale) value
in case of the sale of credit with -
recourse
Total RWE for Credit Risk after
Bank's adjustments
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE
RISK MEASUREMENT AND RISK WEIGHTS (NRB Directives 2077):

1. All claims on Government of Nepal and Nepal Rastra Bank shall be risk weighed at
0 %.
2. Claims on the Bank for International Settlements, the International Monetary
Fund, the European Central Bank and the European Community will receive a 0%
risk weight
3. Following Multilateral Development Banks (MDBs) will be eligible for a 0% risk
weight
- World Bank Group, comprised of the International Bank for Reconstruction and
Development (IBRD) and the International Finance Corporation (IFC),
- Asian Development Bank (ADB),
- African Development Bank (AfDB),
- European Bank for Reconstruction and Development (EBRD),
- Inter-American Development Bank (IADB), and so on.

4. The risk weight for claims on domestic public sector entities will be 100%.
5. All claims, irrespective of currency, excluding investment in equity shares and other
instruments eligible for capital funds, on domestic banks/financial institutions that fulfill
Capital Adequacy Requirements will be risk weighed at 20% while for the rest, it
will be 100%.
6. Lending to individuals meant for acquiring or developing residential property
which are
- fully secured by mortgages on residential property, that is or will be occupied by the
borrower or that is rented, will be risk-weighted at 60%.
- Where the loan is not fully secured, such claims have to risk weighed at 150%
7. Claims secured by mortgages on commercial real estate, except past due, shall be
risk weighed at 100%.
8. Any loan, except for claim secured by residential property, which is or has been past
due at any point of time during the last two years, will be risk-weighted at 150% net
of specific provision
9. High risk claims
- 150% risk weight shall be applied for venture capital and private equity investments.
- Exposures on Personal loan in excess of the threshold of regulatory retail
portfolio and exposures on credit card shall warrant a risk weight of 150%.
- Investments in the equity and other capital instruments of institutions, which
are not listed in the stock exchange and have not been deducted from Tier 1
capital, shall be risk weighed at 150%
- The claims which are not fully secured or are only backed up by personal
guarantee shall attract 150% risk weight.
- Where loan cannot be segregated/or identified as regulatory retail portfolio or
qualifying residential mortgage loan or under other categories, it shall be risk
weighed at 150%
10. Interest receivable/claim on government securities will be risk-weighted at 0%
11. Investments in equity or regulatory capital instruments issued by securities firms
will be risk-weighted at 100%
12. Cash in transit and other cash items in the process of collection will be risk weighed
at 20%.
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE
13. Fictitious assets that have not been deducted from Tier 1 capital shall be risk weighed
at 100%
14. Investments in the equity and other capital instruments of institutions, which are
listed in the stock exchange and have not been deducted from Tier 1 capital, shall be
risk weighed at 100%
15. All Other assets will be risk-weighted at 100%
16. Lending against securities (bonds and shares) shall attract risk weight of 100 %.

Off Balance Sheet

1. bills under collection 0%
2. Forward exchange contracts. 10%
3. Short Term Trade-related contingencies 20%
4. Undertaking to provide a commitment on an off-balance sheet items 20%
5. Unsettled11 securities and foreign exchange transactions between bank to bank and
between bank and customer 20%
6. Long term irrevocable Credit Commitments: Any un-drawn portion of committed credit
lines sanctioned for a period of more than 1 year. 50%
7. Performance-related contingencies 40%
8. Long term irrevocable Credit Commitments 50%
9. Short term irrevocable Credit Commitments 20%
10. Repurchase agreements, securities lending, securities borrowing, reverse repurchase
agreements and equivalent transactions. 100%
11. Direct credit substitutes 100%
12. Unpaid portion of partly paid shares and securities 100%
13. Unpaid Guarantee Claim 200%
14. Other Contingent Liabilities 100%

2. Operational Risk

Particulars Years
Year 1 Year 2 Year 3
Net Interest Income
Commission and Discount Income
Other Operating Income
Exchange Fluctuation Income
Addition/Deduction in Interest Suspense during the
period
Gross income (a)

Alfa (b) 15% 15% 15%

Fixed Percentage of Gross Income [c=(a × b)]
Capital Requirement for operational risk (d) (average of c)
Risk Weight (reciprocal of capital requirement of 10%) in times (e) 10
Equivalent Risk Weight Exposure [f=(d × e)]
Adjustments under Pillar II
If Gross Income for all the last three years is negative (6.4 a 8)
Total Credit and Investments (net of specific Provision)
Capital Requirement for Operational Risk (5%)
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE
Risk Weight (reciprocal of capital requirement of 11 %) in times 9.09
[Likewise, for exam use reciprocal of the recent minimum capital
ratio]
Equivalent Risk Weight Exposure (g)
Equivalent Risk Weight Exposure (h= f + g)

Note:
i. Capital Adequacy Framework describes Operational Risk shall be computed on basic
indicator approach i.e. bank shall hold capital equal to average over previous three
years of fixed percentage of positive gross income.
ii. Only Net interest income should be presented in the face of the format.
iii. The gross Income shall include the Interest income and Non-Interest Income but
shall exclude:
a. Reversal during the year in respect of provision and write offs made during the
previous year.
b. Income/gain recognized from the disposal of items of movable and immovable
property
c. Realized Profits/losses from the sale of securities in the “held to maturity
category.
d. Other extraordinary or irregular items of income and expenditure.
3. Market Risk

Current Previous
S. Currency Year Year
No. Open Open Relevant
Position Position Open
(FCY) (NPR) Position
1 INR
2 USD
3 GBP
4 CHF
5 EUR
6 JPY
7 SEK
8 DKK
9 HKD
10 AUD
11 SGD
12 KRW
13 AED
14 MYR
15 THB
16 QAR
17 CNY
18 CAD
19 SAR
20 KWD
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

21 BHD
Total Open Position (a)
Fixed Percentage (b) 5% 5%
Capital Charge for Market Risk [c=(a×b)]
Risk Weight (reciprocal of capital requirement of 9.09 9.09
the minimum capital ratio of 11%).Likewise, for
exam use the reciprocal of the recent minimum
capital ratio)
Equivalent Risk Weight Exposure [e=(c×d)]

Illustration 3: Capital Adequacy Frameworks 2007 issued Nepal Rastra Bank has
segregated the Credit Risk Weighted exposure under 11 categories of Credit Risk. The
Following balances on each of the 11 categories of credits are extracted from the records of
Development Bank Limited with their respective risk weights as per specified in Capital
Adequacy Frameworks.

S.N Particula Carrying Risk

. rs Amount Weight
1 Claims on government & central 0%
bank
2 Claims on other official entities 8,031,605 20%
3 Claims on banks 6,583,790 20%
4 Claims on corporate & securities 8,995,269 100%
firms
5 Claims on regulatory retail 1,486,089 75%
portfolio
6 Claims secured by residential 1,153,690 60%
properties
7 Claims secured by commercial real 5,418,812 100%
state
8 Past due claims 53,17 150%
5
9 High risk claims 3,362,105 150%
10 Other assets 1,568,969 100%
11 Off balance sheet items 20,373,804 50%
Total 77,027,308

The above balances are extracted without considering the following information:
1. Credit risks mitigants on high risk claims, past due loans and off balance sheet items of
Rs. 362,105, Rs. 3,175 and Rs. 373,804 respectively were not considered.
2. The Bank has provided Term Loan to a party of Rs. 1,250,000 in excess of Single
Obligor Limit (SOL).
3. The Bank has entered into a Credit Sales agreement with recourse facilities of Rs.
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE
5,125,150.

From the above information, find out the Risk Weighted Exposure for Credit Risk.

Solution: Development Bank Limited

Computation of Risk Weighted Exposure of Credit Risk
Risk
Gross Net Risk
S.N. Particulars CRM Weighted
Amount Amou Weig
Exposure
nt ht
1 Claims on
government &
central bank 0%
Claims on other
2 official entities 8,031,605 8,031,605 20 1,606,321
%

3 Claims on 6,583,790 6,583,790 20 1,316,758

banks %
Claims on
4 corporate & 28,995,269 28,995,269 100% 28,995,269
securities firms
Claims on
1,486,089 1,486,089 75% 1,114,567
5 regulatory retail
portfolio
Claims secured
1,153,690 1,153,690 60% 692,214
6 by residential
properties
Claims secured
7 5,418,812 100% 5,418,812
by commercial 5,418,812
real state
8 Past due claims 53,175 (3,175) 50,000 150% 75,000

9 (362,105) 3,000,000 150% 4,500,000

High risk claims 3,362,105
10 Other assets 1,568,969 1,568,969 100% 1,568,969
Off balance
11 (373,804) 20,000,000 50% 10,000,000
sheet items 20,373,804
Total 77,027,308 (739,084) 76,288,224 55,287,910
Add: 10 % of the amount of loan provided in excess of SOL
(1,250,000*10%) 125,000
1% of contract amount of credit sales with recourse facility
(5,125,150*1%) 51,252
Total Risk Weighted Exposure for Credit Risk 5,464,162

Illustration 4: From the following information, find out the risk weighted exposure for Operational
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE
a format prescribed in Capital Adequacy Frameworks 2007.
Amount in ‘000’
Particula Year I Year II Year III
rs
Interest Income 1,466,454 1,626,474 1,775,583
Interest Expense 561,964 648,842 767,411
Commission and Discount Income 132,816 165,448 193,224
Other Operating Income 137,301 198,130 151,637
Exchange Fluctuation Income 41,301 52,325 40,329
Addition in Interest Suspense Account 25,693 34,376 36,711
Non-Operating and Extra Ordinary Income 2,795 1,887 100,257

Solution:
Risk Weighted Exposure of Operational Risk
Particulars Year 1 Year 2 Year 3
Net Interest Income 904,490 977,632 1,008,172
Commission and Discount Income 132,816 165,448 193,224
Other Operating Income 137,301 198,130 151,637
Exchange Fluctuation Income 41,301 52,325 40,329
Additional/Deduction in Interest
Suspense 25,693 34,376 36,711
during the period
Gross income (a) 1,241,601 1,427,911 1,430,073
Alfa (b) 15% 15% 15%
Fixed Percentage of Gross Income 186,240 214,187 214,511
[c=(a × b)]
Capital Requirement for operational risk (d) (average of c) 204,979
Risk Weight in Times(e) [reciprocal of capital requirement of 11% 9.09
in times]
Likewise, for exam use reciprocal of the recent minimum capital
ratio.
Equivalent Risk Weight Exposure [f=(d × e)]
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

Note:
a). The format of Operational Risk prescribed in Capital Adequacy Frameworks
state that only Net Interest Income should be presented in the face of the format.
Hence Net Interest Income of all three years is computed as follows:

Particulars Year I Year II Year III

Interest Income 1,466,454 1,626,474 1,775,583
Less: Interest Expense (561,964) (648,842) (767,411)
Net Interest Income 904,490 977,632 1,008,172

b. Capital Adequacy Framework states that Operational risk-weighted assets are

determined by multiplying the operational risk capital charge by 11 (i.e. the
reciprocal of the minimum capital ratio of 11%) and adding together with the risk
weighted exposures for credit risk. Likewise, for exam use the recent rate (i.e.
recent the reciprocal of the minimum capital ratio)

Illustration 5: Following foreign currency assets and liabilities balances with their respective
exchange rates are extracted from records of Nepal Commercial Bank Limited. From the given
information calculate the Risk Weighted Exposure for Market Risk in the format prescribed in
Capital Adequacy Framework.

S.N Currency Exchange Rate Assets Liabilities

.
1 INR 1.60 13,250 3,840
2 USD 83 12,548 44,687
3 EUR 110 11,586 877
4 GBP 123 250 125
5 CHF 69 144
6 AUD 84 190 84
7 CAD 73 180 44
8 SGD 62 185 55
9 JPY 0.90 64,573 48,544
10 SEK 10 160
11 DKK 13 170
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

12 HKD 10 133
13 SAR 21 149
14 QAR 21 196
15 CNY 36 266
16 MYR 22 323
17 THB 0.60 233
18 AED 22 355 84
Total 104,891 98,340

Solution:
Nepal Commercial Bank Limited Risk Weighted Exposure for Market Risk

Open Open Relevant

Ex.
S.N. Currency Assets Liabilities Position Position Open
Rate
(FCY) (NPR) Position
1 INR 13,250 3,840 9,410 1.60 15,063 15,063
2 USD 12,548 44,687 (32,139) 83 (2,667,544) 2,667,544
3 EUR 11,586 877 10,710 110 1,178,083 1,178,083
4 GBP 250 125 125 123 15,375 15,375
5 CHF 144 - 144 69 9,953 9,953
6 AUD 190 84 106 84 8,904 8,904
7 CAD 180 44 136 73 9,928 9,928
8 SGD 185 55 130 62 8,060 8,060
9 JPY 64,573 48,544 16,029 0.90 14,425 14,425
10 SEK 160 - 160 10 1,603 1,603
11 DKK 170 - 170 13 2,285 2,285
12 HKD 133 - 133 10 1,345 1,345
13 SAR 149 - 149 21 3,087 3,087
14 QAR 196 - 196 21 4,105 4,105
15 CNY 266 - 266 36 9,466 9,466
16 MYR 323 - 323 22 7,070 7,070
17 THB 233 - 233 0.60 139 139
18 AED 355 84 271 22 5,962 5,962
Total Open Position (a) 3,962,397
Fixed Percentage (b) 5%
Capital Charge for Market Risk [c=(a x b)] 198,120
Risk Weight (reciprocal of capital requirement of 11%) in times (d) 9.09
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

Likewise, for exam use the recent rate (i.e. recent the reciprocal of the
minimum capital ratio)
Equivalent Risk Weight Exposure {e=(c x d)}

Note:
a. Capital Adequacy Framework 2015 states that the designated Net Open Position approach
requires bank to allocate a fixed proportion of capital in term of its Net Open Position. The
bank should allocate 5% of their Net Open Position as capital charge for Market Risk.
b. Capital Adequacy Framework 2015 requires that Risk-weighted assets in respect of market
risk are determined by multiplying the capital charges by 11 (i.e.the reciprocal of the
minimum capital ratio of 11%) and adding together with the risk weighted exposures for
credit risk. Likewise, for exam use the recent rate (i.e. recent the reciprocal of the
minimum capital ratio)

6. PROVISIONS RELATING TO CLASSIFICATION OFLOANS/ADVANCES AND

LOAN LOSS PROVISIONS

As per the provisions of the Directives, the entire loans and advances including bills purchased
and discounted extended by a licensed institution have to be classified as follows based on expiry
of the deadline of repayment of the principal and interest of such loans/advances:-
1. Performing Loan
a. Pass:
- Loans/advances which have not overdue and which are overdue by a period one month
- Loan against fixed deposit
- Loan against government securities and securities issued by Nepal Rastra Bank
- Gold loan
b. Watch List:
- Loans/advances which are overdue by a period from one month up to three months.
- Working Capital Loan or Temporary loan which was not renewed but payment period
was deferred for temporary period
- Loan issued to the borrower classified as Non-Performing Loan by other bank and
institution
- Even though the payment of working capital loan or Temporary Loan is regular,
borrower is having negative profit or net worth in previous two years

i. Sub-standard: Loans/advances which are overdue by a period from three months to

a maximum period of six months.
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

ii. Doubtful: Loans/advances which are overdue by a period from six-months to a

maximum period of one year.
iii. Loss: Loans/advances which are overdue by a period of more than one year.

The loans which are in pass class and which have been rescheduled/restructured are called
as "the performing loan, and the sub-standard, doubtful and loss categories are called non-
performing loans.

Minimum
Loan classification
Loan Loss
Provision
Pass 1 percent
Watch 5 Percent
List 12.5 Percent
Rescheduled/Restructured
Sub-standard 25 percent
Doubtful 50 percent

Loss 100 percent

Note-Provided that in case of insured loans, it would require to make provision of any 25 % of
rate prescribed rate.

7. Personal Guarantee loan

Even the loan given only on personal/institutional guarantee loan shall be classified as pass,
substandard & doubtful as the case may be, LLP required shall be made 20 % more in
additional to prescribed % of the cases.

8. Loss Loans
In case it seems any of the following discrepancies in any of the following loans, whether or
not the deadline for repayment of which is expired, such loans and advances has to be
categorized as the loss loan:

(a) The market price of the collateral cannot secure the loans;
(b) The debtor is bankrupt or has been declared to be bankrupt;
(c) The debtor disappears or is not identified;
(d) In case non-fund based facilities such as purchased or discounted bills and L/C and
guarantee which have been converted into fund-based loan, are not recovered with
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

in ninety days from the date of their conversion into loan;

(e) Loan is misused;
(f) Expiry of 180 days of the date of auction process after the loan could not be
recovered or a case is pending at a count under the recovery process;
(g) Providing loan to a debtor who has been enlisted in the black-list of Credit
Information Bureau Ltd;
(h) The Project/business is not in a condition to be operated or project or business is not
in operation
(i) The credit card loan is not written off within 90 days from the date of expiry of
the deadline;
(j) While converting the L/C, guarantee and other possible liabilities into a fund based
loan under the regular process, if the said loan is not recovered within 90 days; and
(k) In case of expiry of the deadline of a trust-receipt loan.

9. Single obligor limit

A bank can provide a credit up to 25 % of its core capital to single party. Core capital of
previous quarter is taken as base.
In case, any excess credit is provided above SOL. Then, 100% provision shall be made for
excess credit amount.

10. PROVISIONS RELATED TO CASH RESERVE RATIO(CRR)

Considering impact of COVID-19(As per Monetary Policy 2077/78), the Central Bank has already
implemented following provisions:
It is mandatory for BAFI to maintain a minimum deposit of
A= 3% of Total Deposit
B= 3% of Total Deposit
C= 3% of Total Deposit

It is examined on weekly basis. Only the balance held in ordinary account of NRB is
considered for this purpose. Balance held for special account & in foreign currency is not
considered for this purpose.
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

11. STATUTORY LIQUIDITY RATIO (SLR)

Considering impact of COVID-19(As per Monetary Policy 2077/78), the Central Bank has already
implemented following provisions:
Every BAFI is to maintain minimum liquid assets of
A= 10% of Total Deposit
B= 8% of Total Deposit
C= 7% of Total Deposit
It is examined on monthly basis.

For the purpose of SLR, liquid assets consist of:

i. Amount kept for CRR.
ii. Investment in Nepal Government securities.
iii. Cash balance at own vault.
iv. Amount kept at class A institution by B, C & D for CRR.

Past Questions

1. Non-performing assets

Answer:
While preparing financial statements of a bank, it is necessary to identify non-performing
assets mostly based on statutory/regulatory norms. An asset becomes non-performing
when installment of matured principal and or income from it is not received by the bank
for a certain period. Income from non-performing assets can only be accounted for as and
when it is actually received. Nepal Rastra Bank has issued directives for the classification
of loans and advances. Necessary provision should be made for non-performing assets
classifying as sub-standard, doubtful or loss assets as the case may be as per the rate
prescribed by Nepal Rastra Bank.
NPA is a classification used by financial institutions that refer to loans that are in
jeopardy of default. Once the borrower has failed to make interest or principle payments
for 90 days the loan is considered to be a non-performing asset. Non-performing assets
are problematic for financial institutions since they depend on interest payments for
income. Troublesome pressure from the economy can lead to a sharp increase in non-
performing loans and often results in massive write-downs.
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

The nonperforming asset is not yielding any income to the lender in the form of principal
and interest payments

2. Accounting for Non-Banking assets as per NRB Directives.

Answer:
Banks and financial institutions are primarily engaged in lending activities. No bank or financial
institution lends without getting adequate level of collateral. All the debts of banks are securitized as
there is adequate level of collateral back up. In case where there are least possibilities of recovery of
loans and advances, recovery procedures are initiated and the assets taken as collaterals are taken over
by banks as Non-Banking Assets. The Non-banking assets are to be taken over lower of the following
values:
1. Fair Valuation of collateral at the time of taking over as non-banking assets, or
2. Principal and interest outstanding on the day immediately preceding the day of taking over as
NBA.
In case if Fair Valuation of collateral is less than outstanding loans and advances on the day
immediately preceding the day of taking over as NBA, the balance amount should be written off to
profit and loss account.

3. Following information as at second quarter ending 2071 were drawn from the
records of Shivam Bank Limited as under:

Loans outstanding for: Amount (Rs.)

Up to 3 months 1,868,420
More than 3 months but not more than 6 11,720
months More than 6 months but not more 262
than 12 months More than 12 months 2,032
Total 1,882,434
Following additional information relating to previous quarter ending were extracted
from the records of the bank:

Paid up equity share capital Statutory general 161,016

reserve Retained earnings 163,632
General loan loss provisions Exchange 96,657
equalization reserve 18,497
Un-audited current year cumulative profit 25,919
Deferred revenue expenses 33,185
2,668
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

The bank is in the process of preparing the documents for quarterly reporting. As a
reporting and compliance officer of the bank you are required to calculate movement
in loan loss provision amount. The bank has also provided a Term loan of Rs. 125,000
to a Party during the period under review.
Answer:
As per provisions of the Directive 3 of Unified Directives, a bank can provide a credit
up to 25% of its core capital to single party. This limit is called as Single Obligor Limit
(SOL). While calculating the SOL core capital of previous quarter shall be taken as
base. In case any excess credit has been provided by the bank, additional 100%
provision shall be made for such excess credit amount. Before calculating the
provision amount, SOL of the bank shall be tested upon.

Computation of SOL and credit amount in excess of SOL

Particulars Amount Rs.
Core Capital:
Paid up Equity Share 161,016
Capital Statutory General 163,632
Reserve Retained 96,657
Earnings 33,185
Un-audited current year cumulative (2,668)
profit Less: Deferred Revenue 451,822
Expenses 112,956
Total Core Capital 125,000
Single Obligor Limit (25% of Core 12,044
Capital) Loan to a Single Party
Loan in Excess of SOL
Now, we compute the loan loss provision amount as per provisions
of the Directive 2 of the NRB.
Computation of Loan Loss Provision Amount
Due for Categories Loan Provision Provision
Amount Rate Amount
Not due or <=3 Months Pass 1,868,420 1% 18,684
>3 Months but <=6 Months Substandard 11,720 25% 2,930
>6 Months but <=1 Year Doubtful 262 50% 131
>1 Year Loss 2032 100% 2,032
Total 1,882,434 23,777
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

Additional Provision for 12,044

Loan in excess of SOL
Total Provision Amount 35,821

Shivam Bank Limited

Movement in Provision
Amount
For Second Quarter of Fiscal Year 2071/72

Particulars Amount
Opening Provision Amount 18,497
Closing Provision Amount 35,821
Movement (addition during the Quarter) in Provision 17,324
Amount

4. A Commercial Bank has the following capital funds and assets. Segregate the capital
funds into core capital (Tier I) and supplementary capital (Tier II). Find out the risk
weighted asset and capital fund ratio.

Particulars (Rs. in
crores)
Equity share capital 500.00
Statutory reserve 270.00
Capital reserve (of which Rs. 16 crores were due to
revaluation of 78.00
assets and the balance due to sale of capital asset)
Assets:
Cash balance with Nepal Rastra Bank (NRB) 10.00
Balance with other banks 18.00
Other investments 36.00
Loans and advances:
(i) Guaranteed by the Government 16.50
(ii) Others 5,675.00
Premises, furniture and fixtures 78.00
Off-Balance Sheet items:
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

(i) Advance Payment Guarantee 800.00

(ii) Contingent Liability in respect of Income Tax 4,800.00

Answer:
(i) Rs in Rs in crores
crores
Core Capital- Tier I
Equity share capital 500
Statutory reserve 270
Capital reserve (arising of sale of assets) (78-16) 62
832
Supplementary Capital – Tier II
(Capital Reserve (arising out of revaluation of assets) 16 0.32
As per NRB Directive- Capital Reserve relates with
revaluation reserve of assets, up to 2% of total
Supplementary Capital only allowed for the
computation)
Total Capital Fund 832.32
Rs in crores % of weight Rs in crores
(ii) Risk Weighted Assets
Funded Risk Assets
Cash balance with NRB 10 0 0
Balance with other banks 18 20 3.60
Other investments 36 100 36
Loans and advances:
i) Guaranteed by the government 16.5 0 0
ii) Others 5,675 100 5,675
Premises, furniture and fixtures 78 100 78
5,792.60
Rs in crores Credit
conversion
factor
Off-Balance Sheet items:
Advance Payment Guarantees 800 100 800
Contingent Liability in respect of 4,800 100 4,800
Income 11,392.60
Tax

Capital Fund Ratio:

Capital fund x100 Risk
CA ASPIRANTS-ICAN EXAM ORIENTED REVISION NOTE

weighted assets
= (832.32/11,392.60) x 100 =7.31%