The balance sheet, and the first asset lines

37 terms. The balance sheet of a bank is unlike that of any other business. In a manufacturer, cash is a small residual and inventory dominates. In a bank, money is both the raw material and the product — so almost every line is a financial instrument, and the accounting standard that governs most of the page is NFRS 9.

Part 1 checklist

Assets (17): Cash and cash equivalent · Due from Nepal Rastra Bank · Placement with Bank and Financial Institutions · Derivative financial instruments · Other trading assets · Loan and advances to B/FIs · Loans and advances to customers · Investment securities · Current tax assets · Investment in subsidiaries · Investment in associates · Investment property · Property and equipment · Goodwill and Intangible assets · Deferred tax assets · Other assets · Total Assets

Liabilities (12): Due to Bank and Financial Institutions · Due to Nepal Rastra Bank · Derivative financial instruments · Deposits from customers · Borrowing · Current Tax Liabilities · Provisions · Deferred tax liabilities · Other liabilities · Debt securities issued · Subordinated Liabilities · Total liabilities

Equity (8): Share capital · Share premium · Retained earnings · Reserves · Total equity attributable to equity holders · Non-controlling interest · Total equity · Total liabilities and equity

The structure before the terms

The accounting identity

┌─────────────────────────────────────────────────────────────┐
│                                                             │
│        ASSETS        =     LIABILITIES     +     EQUITY     │
│   (what the bank         (what it owes         (what the    │
│    owns / is owed)        to others)           owners own)  │
│                                                             │
└─────────────────────────────────────────────────────────────┘

What makes a bank's balance sheet different

A MANUFACTURER                          A COMMERCIAL BANK
──────────────                          ─────────────────
Assets                                  Assets
  Inventory        ████████               Loans & advances  ██████████████
  Receivables      ████                   Investments       ██████
  PPE              ██████                 Cash / NRB        ████
  Cash             █                      PPE               ▌

Liabilities                             Liabilities
  Payables         ███                    Deposits          ████████████████████
  Bank loan        ████                   Borrowings        ██
Equity             ██████████            Equity             ██

Equity ≈ 40-60% of assets                Equity ≈ 8-12% of assets
→ LOW leverage                           → VERY HIGH leverage (10x+)

Why leverage matters so much: if a bank funds NPR 100 of assets with NPR 92 of deposits and NPR 8 of equity, a loss of just 8% on its assets wipes out the shareholders entirely. That single arithmetic fact is the entire reason capital adequacy regulation, loan-loss provisioning and NRB supervision exist. Keep it in mind for every asset line: the question a regulator asks is never "what is it worth?" but "what if it isn't?"

The order of the balance sheet

NRB's prescribed format lists assets in descending order of liquidity — cash first, then near-cash, then loans, then illiquid items (PPE, goodwill, deferred tax) last. Liabilities follow roughly by claim priority and permanence. This ordering is itself information: everything below "Investment securities" is hard to turn into cash in a crisis.

ASSETS

Cash and cash equivalent

Simple definition. Physical notes and coins in the bank's vaults and tills, plus money held in accounts at other banks that can be withdrawn immediately, plus very short-term deposits that are effectively as good as cash.

Technical definition. Cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value. Per the source report's own policy note, the maturity test is original maturity of three months or less, measured from the date the acquisition or placement was made.

Purpose. It is the bank's immediate settlement capacity. Every payment it makes today — a customer withdrawal, a cheque clearing, an interbank settlement — comes out of this line.

Nepalese commercial-bank context. For a Nepali Class "A" bank this typically comprises:

• Nepali rupee notes and coins in vault and ATMs across the branch network
• Foreign currency notes held for the exchange counter
• Balances with correspondent banks abroad (nostro accounts — USD, EUR, INR, GBP)
• Balances with other domestic BFIs held on demand
• Very short placements originally made for ≤ 3 months

Framework. NAS 7 Statement of Cash Flows defines cash and cash equivalents. NFRS 9 governs classification and measurement — these are financial assets held to collect contractual cash flows and are measured at amortised cost.

Classification. Financial asset at amortised cost. Current by nature.

Recognition criteria. Recognised when the bank becomes party to the contractual provisions — i.e. when it receives the cash or acquires the right to demand it.

Initial measurement. Fair value, which for cash equals face value. Directly attributable transaction costs are added, though these are typically nil.

Subsequent measurement. Amortised cost. For balances repayable on demand, amortised cost equals face value. Foreign currency balances are retranslated at each reporting date at the NRB mid-point exchange rate, with the difference taken to profit or loss (see Foreign Exchange Transactions, Part 8).

A critical exclusion. The report states explicitly: "Restricted deposits are not included in cash and cash equivalents. These are measured at amortised cost and presented as a line item on the face of the consolidated Statement of Financial Position."

Accounting-entry logic.

Customer deposits NPR 5,000,000 in cash:

Dr  Cash and cash equivalent          5,000,000
    Cr  Deposits from customers                   5,000,000

Note that a cash deposit grows both sides of the balance sheet. The bank has more cash, but it also owes more. It has not become richer — a point beginners regularly miss.

Bank places NPR 200,000,000 with another BFI for 60 days:

Dr  Cash and cash equivalent (placement ≤3m)  200,000,000
    Cr  Cash and cash equivalent (vault/nostro)     200,000,000

No change in total — a movement within the line.

Financial-statement presentation. First line of assets. It is also the closing figure that the Statement of Cash Flows must reconcile to — the two statements are locked together. If your cash flow statement's closing balance does not equal this line, one of them is wrong.

(NMB, Asar 2083: Group NPR 22,274,716 thousand, down from NPR 46,995,817 thousand a year earlier — a fall of more than half, which the cash flow statement explains as a NPR 16.5bn net investing outflow plus a NPR 10.5bn operating outflow.)

Effect on profit or loss. Interest earned on nostro and short placements is Interest income. FX retranslation of foreign-currency cash goes to Other operating income as revaluation gain/loss.

Effect on cash flow. This line is the subject of the cash flow statement. It does not "affect" it; it is what the statement explains.

Effect on regulatory ratios. Cash and near-cash are the core of the Net Liquid Assets (NLA) numerator — see Part 6, Liquidity Ratio (NLA). Vault cash and NRB balances also interact with the Cash Reserve Ratio (CRR) requirement.

Analyst interpretation.

• A big fall is not automatically bad. Cash earns little. Moving it into loans or government securities raises income. NMB's fall coincides with a NPR 16.5bn purchase of investment securities — a deliberate redeployment, not a drain.
• A big rise with flat lending can signal the bank cannot find creditworthy borrowers — a "liquidity trap" that crushes net interest margin.
• Always read this line with the CD ratio and NLA. Cash alone tells you little.

Related terms. Placement with Bank and Financial Institutions · Due from Nepal Rastra Bank · Part 4 (all cash flow terms) · Part 6 Liquidity Ratio (NLA) · Part 8 Cash and cash equivalents, Restricted deposits

Due from Nepal Rastra Bank

Simple definition. Money the commercial bank keeps at the central bank.

Technical definition. Balances receivable from Nepal Rastra Bank, comprising statutory balances the bank is required to maintain and any voluntary excess, measured at amortised cost.

Purpose. Two purposes, which is why it deserves its own line:

1. 1Regulatory — NRB requires every BFI to hold a minimum balance with it (the **Cash

Reserve Ratio, CRR**), computed on deposit liabilities. This is a monetary-policy and depositor-protection tool.

1. 1Operational — it is the settlement account through which interbank payments,

clearing and NRB transactions run.

Nepalese context. This is a distinctively Nepali/emerging-market line item. It is separated from ordinary bank balances precisely because part of it is not freely usable. NRB monitors CRR compliance on a periodic averaging basis and penalises shortfalls.

Framework. NFRS 9 (amortised cost). Compliance requirement from the NRB Unified Directives issued under the Nepal Rastra Bank Act and the Bank and Financial Institutions Act (BAFIA).

Debit/credit nature. Debit balance (an asset). Increases when the bank transfers funds to NRB or receives NRB credits; decreases on withdrawal or settlement outflows.

Measurement. Initially fair value; subsequently amortised cost. Typically non-interest-bearing or low-yielding, which is an implicit tax on the bank.

Presentation. Second asset line. Note disclosure typically splits statutory balance from other balances.

(NMB, Asar 2083: Group NPR 18,740,521 thousand, up from NPR 16,519,123 thousand — consistent with deposit growth, since a larger deposit base requires a larger statutory balance.)

Effect on ratios. Included in liquid assets for NLA purposes. A rising deposit base mechanically raises the required balance here, consuming cash.

Analyst interpretation. Read this line against deposit growth. If deposits grew 12% and this line grew 13%, that is simply CRR mechanics. A sharp divergence deserves a question.

Related terms. Cash and cash equivalent · Due to Nepal Rastra Bank · Part 6 Liquidity Ratio (NLA) · Part 12 Nepal Rastra Bank (NRB), Unified Directives

Placement with Bank and Financial Institutions

Simple definition. Money the bank has lent to other banks for a fixed short period.

Technical definition. Interbank placements with original maturity greater than three months (placements of three months or less fall into cash equivalents), measured at amortised cost, representing funds lent to domestic or foreign BFIs.

Purpose. A parking place for surplus liquidity that earns more than a nostro balance but stays short and low-risk. It is the bank's liquidity-management shock absorber.

Nepalese context. Nepali banks place funds:

• Domestically with other Class A/B/C institutions in the interbank market — rates here are a real-time signal of system liquidity. During a liquidity squeeze the interbank rate spikes and placements shrink.
• Abroad with correspondent banks, in USD and other convertible currencies, often linked to trade finance and remittance flows.

Framework. NFRS 9 — amortised cost (held to collect contractual cash flows). Subject to ECL, generally Stage 1 with a small 12-month expected credit loss.

What creates / changes the balance. Created by placing funds; reduced on maturity or early recall. Balance rises when the bank is liquid and loan demand is weak; falls when funds are pulled into lending.

Debit/credit nature. Debit (asset).

Gross vs net presentation. Presented net of any ECL allowance, though the allowance is usually immaterial for interbank exposures.

Journal entry.

On placement:
Dr  Placement with BFIs                   500,000,000
    Cr  Cash and cash equivalent                       500,000,000

Interest accrual:
Dr  Interest receivable (Other assets)      6,250,000
    Cr  Interest income                                  6,250,000

Illustrative example. HCBL places NPR 500 million with another commercial bank for 6 months at 5% p.a.

Interest for 6 months = 500,000,000 × 5% × (6/12) = NPR 12,500,000
Monthly accrual       = 12,500,000 ÷ 6            = NPR  2,083,333

Effect on P&L. Interest income. Effect on cash flow. An operating-activity movement for a bank (see Part 4 — banks classify placements as operating, not investing, because they are part of the core money-dealing business).

Analyst interpretation. A large and growing placement book alongside weak loan growth means the bank is struggling to deploy deposits into higher-yielding loans, which compresses net interest margin. It is a defensive posture, not a strong one.

Related terms. Cash and cash equivalent · Loan and advances to B/FIs · Part 8 Expected Credit Loss

Derivative financial instruments (asset)

Simple definition. Contracts whose value moves with something else — an exchange rate, an interest rate — that are currently in the bank's favour, i.e. worth money to it.

Technical definition. Financial instruments that (i) derive their value from an underlying variable, (ii) require little or no initial net investment, and (iii) are settled at a future date. Where the fair value is positive at the reporting date the contract is a derivative financial asset; where negative, a derivative financial liability. Per the source report, derivatives are "measured at FVTPL and corresponding fair value changes are recognized in profit or loss."

Purpose. Nepali banks use derivatives predominantly to manage foreign-exchange risk arising from:

• Import letters of credit (a future USD obligation)
• Export receivables (a future USD inflow)
• Remittance flows (large, steady inbound USD/AED/MYR/KRW)
• Their own foreign-currency borrowings

Nepalese context. The Nepali derivative market is narrow. In practice this line is dominated by forward foreign-exchange contracts and currency swaps, mostly USD/NPR and USD/INR-linked, transacted with correspondent banks abroad or in the domestic interbank market. Complex structured derivatives are rare. NRB regulates permitted derivative activity and open-position limits.

A structural point most readers miss. In the source report, derivative assets (NPR 19,021,033 thousand) and derivative liabilities (NPR 19,140,536 thousand) are both large and almost equal. That is not a coincidence and not a sign of huge speculation:

Derivative asset      19,021,033  ┐
                                  ├── near-offsetting positions,
Derivative liability  19,140,536  ┘    presented GROSS
                      ──────────
Net economic position    (119,503)  ← the actual exposure

NAS 32 permits offsetting only where there is a legally enforceable right of set-off and an intention to settle net. Absent that, gross presentation is mandatory — which inflates both sides of the balance sheet without inflating risk.

Recognition. On trade date, not settlement date. The source report is explicit: financial instruments are recognised on a settlement-date basis "except for derivative instruments, which are recognized on a trade date basis." This is a genuine exception you must remember.

Initial measurement. Fair value, normally close to zero at inception for a plain forward struck at market rates.

Subsequent measurement. Fair value through profit or loss (FVTPL). Fair value moves each reporting date; the change hits P&L immediately.

Journal-entry logic.

HCBL enters a 3-month forward to buy USD 1,000,000 at NPR 141.00. Illustrative.

At inception — fair value ≈ 0, no entry beyond memorandum record.

At reporting date, forward rate for the remaining tenor = NPR 142.50:
Gain = (142.50 − 141.00) × 1,000,000 = NPR 1,500,000

Dr  Derivative financial asset            1,500,000
    Cr  Net trading income                            1,500,000

If instead the rate had moved to NPR 139.50:

Dr  Net trading income                    1,500,000
    Cr  Derivative financial liability                1,500,000

Presentation. Asset side and liability side separately, both at fair value. Note disclosure should give notional amounts, fair values and the fair-value hierarchy level (usually Level 2 — valued from observable forward points, not a quoted price).

Effect on P&L. Direct and immediate, through Net trading income. This makes derivatives a source of earnings volatility.

Effect on OCI. None, unless hedge accounting is applied. The source report shows a line for Gains/(losses) on cash flow hedge in OCI but reports nil — meaning the bank is not applying hedge accounting, so all derivative movement goes straight to P&L. That is the common Nepali position, because hedge accounting under NFRS 9 carries heavy documentation and effectiveness-testing requirements.

Effect on regulatory ratios. Derivatives attract counterparty credit risk in the RWA computation under NRB's Capital Adequacy Framework, typically via a credit-equivalent add-on. Gross balance-sheet growth from derivatives does not proportionally consume capital, because the RWA treatment is based on credit equivalent, not gross notional.

Analyst interpretation.

• Check whether asset and liability are roughly matched. Matched = hedging. Badly unmatched = directional position-taking, which deserves a hard question.
• A big year-on-year jump in both (NMB: from ~NPR 8.7bn to ~NPR 19bn on each side) means

higher derivative volume, usually tracking trade finance and remittance activity — not necessarily higher risk.

• Volatile Net trading income with large derivative balances is expected.

Related terms. Derivative financial instruments (liability) · Part 2 Net trading income · Part 8 FVTPL, Fair value hierarchy, Offsetting, Trade date basis · Part 12 Capital Adequacy Ratio