Chapter 1 · Part 1 — Statement of Financial Position
Loans and investment securities
The two lines that carry almost all the risk and almost all the return, and the higher-of impairment rule that governs them.
Other trading assets
Simple definition. Securities the bank bought intending to sell again soon for a profit, rather than to hold and collect interest.
Technical definition. Financial assets held for trading — acquired principally for the purpose of selling or repurchasing in the near term, or part of a portfolio managed together for short-term profit-taking. Measured at FVTPL by nature.
Purpose. Isolates the genuinely speculative/market-making portfolio from the banking-book investments held for yield.
Nepalese context. This line is typically small or nil for Nepali commercial banks, which is exactly what the source report shows (NMB, Asar 2083: nil for both Group and Bank, against NPR 140,517 thousand at Group level the prior year). Reasons:
- Nepal has no deep, liquid secondary market in corporate bonds
- Government securities are mostly bought to hold (and to meet statutory liquidity)
- Active equity trading by banks is constrained by NRB rules on investment in shares
Classification. FVTPL, mandatorily. Held-for-trading assets can never be at amortised cost or FVOCI.
Measurement. Initial: fair value, with transaction costs expensed immediately (a distinguishing feature of FVTPL — everywhere else they are capitalised). Subsequent: fair value, changes to P&L.
Journal entry.
Purchase NPR 50,000,000 of a listed security, brokerage NPR 250,000:
Dr Other trading assets 50,000,000
Dr Other operating expense (brokerage) 250,000 ← expensed, not capitalised
Cr Cash 50,250,000
Fair value rises to NPR 52,000,000:
Dr Other trading assets 2,000,000
Cr Net trading income 2,000,000Effect on P&L. Fully and immediately, through Net trading income. Effect on OCI. None — that is the point of the FVTPL classification.
Analyst interpretation. A Nepali bank with a suddenly large trading book has changed its risk appetite. Ask why. A nil balance is normal and unremarkable.
Related terms. Investment securities · Part 2 Net trading income · Part 8 FVTPL, Business model test
Loan and advances to B/FIs
Simple definition. Loans the bank has given to other banks and financial institutions as a lending business — not as short-term liquidity parking.
Technical definition. Credit facilities extended to licensed banks and financial institutions (Class A, B, C and D), measured at amortised cost and subject to ECL under NFRS 9 and to loan classification and provisioning under the NRB Unified Directives.
Purpose and Nepalese context. In Nepal this line is materially about the microfinance channel. Commercial banks (Class A) lend wholesale to microfinance institutions (Class D / Laghubitta Bittiya Sanstha), which on-lend to end borrowers. This serves two ends at once:
- 1It earns a spread on a wholesale, relationship-managed exposure.
- 2It contributes to the bank's deprived-sector lending obligation, since lending to
microfinance counts toward that requirement.
The source report shows a telling difference between Group and Bank:
Group Bank (NMB standalone) Loan and advances to B/FIs 9,424,047 12,015,936
The Bank figure is higher because it includes lending to its own subsidiary NMB Laghubitta Bittiya Sanstha. On consolidation that intra-group loan is eliminated — you cannot lend to yourself. See Part 8 Basis of Consolidation and Part 10 Intra-group transactions.
What creates / changes the balance. Disbursement increases it; repayment, write-off and higher impairment allowance decrease it.
Debit/credit nature. Debit (asset), presented net of impairment allowance.
Measurement. Initially fair value plus directly attributable transaction costs; subsequently amortised cost using the effective interest method, less ECL.
Effect on P&L. Interest income; impairment charge/reversal. Effect on regulatory ratios. Consumes RWA at a risk weight set by the Capital Adequacy Framework; forms part of total loans for CD-ratio and NPL-ratio denominators; supports the deprived-sector computation.
Analyst interpretation. Growth here is usually a deliberate deprived-sector compliance strategy rather than an opportunistic credit decision. Because microfinance in Nepal has experienced sector-wide stress episodes, concentration in this line is worth monitoring against the bank's overall NPL trend.
Related terms. Placement with BFIs · Loans and advances to customers · Part 9 Deprived · Part 10 Transaction with Subsidiaries · Part 12 Class "D" financial institution
Loans and advances to customers
Simple definition. The money the bank has lent to businesses and individuals. This is the bank's main business and usually its single largest asset.
Technical definition. Financial assets arising from credit facilities extended to non-bank customers, held within a business model whose objective is to collect contractual cash flows that are solely payments of principal and interest (SPPI), therefore measured at amortised cost using the effective interest method, less an allowance for expected credit losses, and additionally subject to NRB loan classification and provisioning.
Purpose. It generates the Interest income that drives everything else. It is also where essentially all of the bank's credit risk lives.
The dual-regime problem — the most important concept in Part 1
A Nepali bank must measure this line twice, under two different rulebooks, and then report the higher provision.
LOANS AND ADVANCES TO CUSTOMERS
(gross carrying amount)
│
┌────────────────────┴────────────────────┐
│ │
▼ ▼
┌────────────────────────┐ ┌──────────────────────────┐
│ NFRS 9 — ACCOUNTING │ │ NRB — REGULATORY │
│ │ │ │
│ Expected Credit Loss │ │ Loan classification: │
│ ├ Stage 1: 12-mo ECL │ │ ├ Pass │
│ ├ Stage 2: lifetime │ │ ├ Watchlist │
│ └ Stage 3: lifetime, │ │ ├ Substandard ┐ │
│ credit-impaired │ │ ├ Doubtful ├ NPL │
│ │ │ └ Loss ┘ │
│ Forward-looking, │ │ │
│ probability-weighted │ │ Prescribed % provision │
│ │ │ per grade [R] │
└───────────┬────────────┘ └────────────┬─────────────┘
│ │
└──────────────┬─────────────────────────┘
▼
┌───────────────────────────┐
│ IMPAIRMENT RECOGNISED │
│ = HIGHER of the two │
└───────────────────────────┘The source report states this rule directly: "the Bank has recognized impairment on credit exposures based on the higher of total ECL calculated as per NFRS 9 and existing regulatory provisions in the Unified Directives" — per the NFRS 9 Expected Credit Loss (ECL) Related Guidelines, 2024 issued by NRB.
NRB loan classification. The five grades — Pass, Watchlist, Substandard, Doubtful, Loss — are structural and stable. Non-performing loans (NPL) = Substandard + Doubtful + Loss. Watchlist is not NPL, though it is an early-warning bucket.
Recognition. When the bank becomes party to the loan contract — on disbursement, not on sanction. An approved but undrawn facility is an off-balance-sheet commitment, though it still attracts ECL under NFRS 9 and may attract regulatory provisioning.
Initial measurement. Fair value plus directly attributable transaction costs and fees that are integral to the effective interest rate — loan documentation fees, for example, are not taken to income immediately but spread across the loan's life through EIR.
Subsequent measurement.
Amortised cost = Gross carrying amount − Impairment allowance
Gross carrying amount = principal outstanding
+ accrued interest (Stage 1 and 2, accrual basis)
± unamortised fees and transaction costsNepal-specific EIR nuance. The source report notes: "From FY 2083/84, EIR shall be applicable for all financial assets except old term loan (Old term loan refers to loans booked up to Asar end 2083). Therefore, as per Interest Income Recognition Guidelines (With Amendment) has been followed and income has been recognized based on Gross Interest Rate."
Interest recognition by stage — per NRB's Interest Income Recognition Guidelines:
| Stage | Interest recognised on | Basis |
|---|---|---|
| Stage 1 | Gross carrying amount | Accrual |
| Stage 2 | Gross carrying amount | Accrual |
| Stage 3 | — | **Cash basis** (incremental) |
Once a loan is credit-impaired, the bank stops accruing interest into income and recognises it only when actually received. This is why NPL formation hits income twice: a provision charge and a halt to interest accrual.
Journal-entry logic.
1. Disbursement of NPR 100,000,000:
Dr Loans and advances to customers 100,000,000
Cr Cash and cash equivalent 100,000,0002. Interest accrual at 11% p.a. for one month:
100,000,000 × 11% × (1/12) = NPR 916,667
Dr Interest receivable / Loans 916,667
Cr Interest income 916,6673. ECL recognition — Stage 1 at 1.2% (illustrative rate):
Dr Impairment charge for loans (P&L) 1,200,000
Cr Allowance for impairment (contra-asset) 1,200,0004. Loan downgraded to Substandard; required provision rises to 25% (illustrative):
Required: 100,000,000 × 25% = 25,000,000
Already held: 1,200,000
Incremental charge: 23,800,000
Dr Impairment charge for loans 23,800,000
Cr Allowance for impairment 23,800,000
And interest accrual STOPS — future interest recognised on cash basis only.5. Write-off of an unrecoverable loan (allowance already 100%):
Dr Allowance for impairment 100,000,000
Cr Loans and advances to customers 100,000,000Note: a write-off has no P&L effect — the charge happened earlier when the allowance was built. Write-off only cleans the balance sheet. This is a very common misunderstanding.
6. Subsequent recovery of a written-off loan:
Dr Cash 8,000,000
Cr Impairment charge/(reversal) 8,000,000 ← incomeWorked NPL example. Illustrative — HCBL.
Gross loans and advances NPR 100,000,000,000
Substandard NPR 1,000,000,000
Doubtful NPR 600,000,000
Loss NPR 400,000,000
────────────────────
Non-performing loans (NPL) NPR 2,000,000,000
Total loan-loss provision held NPR 1,500,000,000 (against all grades)
NPL ratio = 2,000,000,000 ÷ 100,000,000,000 × 100 = 2.00%
Provision coverage
= 1,500,000,000 ÷ 2,000,000,000 × 100 = 75.00%
Net NPL = (2,000,000,000 − 1,500,000,000)
÷ (100,000,000,000 − 1,500,000,000) × 100 = 0.51%Interpretation of that example. A 2% NPL ratio is moderate. Coverage of 75% means a quarter of recognised bad loans is still unprovided — the bank is relying on collateral recovery for that portion. Net NPL of 0.51% is the residual credit hole relative to the net book. Watch all three together: a falling NPL ratio with falling coverage can mean the bank wrote off its worst loans rather than genuinely improving.
Presentation. Net of impairment allowance on the face. Notes must disclose gross amount, allowance movement, classification by NRB grade, sector concentration, and staging.
(NMB, Asar 2083: Group NPR 258,399,832 thousand, up from NPR 235,196,355 thousand — roughly 10% growth. The published NPL to total loan rose to 5.18% from 4.51%, and the Bank's management analysis states NPL "has increased to 4.91% from 4.11% as compared to previous quarter" — i.e. deteriorating asset quality alongside book growth.)
Effect on P&L. The dominant driver of Interest income, and the source of Impairment charge/(reversal) for loans and other losses.
Effect on cash flow. Loan growth is a cash outflow in operating activities for a bank. This is why a fast-growing, profitable bank can show negative operating cash flow — see Part 4.
Effect on regulatory ratios.
- RWA — the largest contributor; risk weights vary by exposure type and collateral [R]
- CD ratio — numerator
- NPL ratio, provision coverage, net NPL — all computed off this line
- Deprived sector — sub-classification of it
- Capital adequacy — indirectly, since impairment reduces retained earnings and hence capital
Analyst interpretation.
- Growth plus stable NPL and coverage = healthy.
- Growth plus rising NPL = the bank may be buying growth with weaker underwriting, and the loss will surface in later quarters (credit problems lag origination by 12–24 months).
- Falling NPL plus falling coverage = check for write-offs and restructuring.
- Compare loan growth to deposit growth. Loans outgrowing deposits pushes up the CD ratio toward its regulatory ceiling and forces expensive funding.
Related terms. Loan and advances to B/FIs · Part 2 Interest income, Impairment charge/(reversal) · Part 6 NPL ratio, Total loan loss provision to Total NPL, CD Ratio · Part 8 ECL, Stage 1/2/3, EIR, Amortised cost · Part 11 Concentration of Credit exposures · Part 15
Investment securities
Simple definition. Bonds, bills and shares the bank owns — mainly government securities held to earn interest and to satisfy liquidity requirements.
Technical definition. Debt and equity instruments held other than for trading, classified under NFRS 9 according to the business model and contractual cash flow characteristics (SPPI) tests, and measured accordingly at amortised cost, FVOCI or FVTPL.
Purpose. Three jobs at once:
- 1Yield on funds not deployed in loans
- 2Liquidity buffer — government securities are the most reliably sellable/repo-able
asset a Nepali bank holds
- 1Regulatory compliance — statutory liquidity requirements
Nepalese context. Overwhelmingly Nepal Government treasury bills and development bonds, plus NRB bonds. Also holds:
- Shares in listed and unlisted companies (subject to NRB limits [R])
- Mutual fund units — the source report notes NMB Capital manages funds such as
Sulav Investment Fund-2 and NMB 50, and the bank receives distributions from them
- Corporate debentures
The report's policy note is explicit: "As per NFRS 9 'Financial Instruments', Investment Securities (investment in equity shares and mutual funds) are measured at fair value."
The NFRS 9 classification decision.
FINANCIAL ASSET (debt instrument)
│
┌────────────────┴────────────────┐
│ Does it pass the SPPI test? │
│ (cash flows = solely payments │
│ of principal and interest) │
└────────────────┬────────────────┘
NO ──────────┴────────── YES
│ │
▼ ▼
┌──────────┐ ┌────────────────────────────┐
│ FVTPL │ │ What is the BUSINESS │
│(mandatory)│ │ MODEL for holding it? │
└──────────┘ └─────────────┬──────────────┘
│
┌─────────────────────┬───────────────┴──────────────┐
▼ ▼ ▼
┌──────────────────┐ ┌────────────────────┐ ┌──────────────────┐
│ Hold to COLLECT │ │ Hold to COLLECT │ │ Other (e.g. held │
│ contractual │ │ AND SELL │ │ for trading) │
│ cash flows │ │ │ │ │
│ ↓ │ │ ↓ │ │ ↓ │
│ AMORTISED COST │ │ FVOCI │ │ FVTPL │
│ │ │ (debt: recycled │ │ │
│ ECL applies │ │ to P&L on sale) │ │ No ECL │
└──────────────────┘ └────────────────────┘ └──────────────────┘
EQUITY instruments: always FVTPL, unless the bank makes an
irrevocable election at initial recognition to present fair value
changes in OCI (FVOCI-equity). That election means gains are
NEVER recycled to P&L — not even on disposal.Recognition. Settlement-date basis, per the source report's stated policy.
Initial measurement. Fair value plus transaction costs — except for FVTPL, where transaction costs are expensed.
Subsequent measurement. Per classification above. For the FVOCI-equity election used widely by Nepali banks for their strategic and forced shareholdings, movements go to the Fair value reserve in equity via OCI (see Part 3).
Journal-entry logic.
1. Purchase NPR 1,000,000,000 of a 91-day treasury bill at a discount of NPR 985,000,000:
Dr Investment securities 985,000,000
Cr Cash and cash equivalent 985,000,000
Discount accretes to income over the tenor via EIR:
Dr Investment securities 15,000,000 (over 91 days)
Cr Interest income 15,000,0002. Equity investment designated FVOCI, cost NPR 50,000,000, fair value NPR 58,000,000:
Dr Investment securities 8,000,000
Cr OCI — Fair value reserve 8,000,000
Deferred tax on the gain (illustrative 30% [R]):
Dr OCI — Income tax relating to above items 2,400,000
Cr Deferred tax liability 2,400,000
Net OCI impact: 8,000,000 − 2,400,000 = NPR 5,600,000Compare the source report's OCI, which shows exactly this pairing: a fair-value gain/(loss) line immediately followed by Income tax relating to above items.
3. That FVOCI-equity investment is sold for NPR 58,000,000:
Dr Cash 58,000,000
Cr Investment securities 58,000,000
The NPR 8,000,000 cumulative gain in the fair value reserve is
transferred WITHIN EQUITY to retained earnings.
It is NOT recycled through profit or loss.
Dr Fair value reserve 8,000,000
Cr Retained earnings 8,000,000Presentation. Single line on the face; notes disaggregate by instrument type, measurement category and fair-value hierarchy level.
(NMB, Asar 2083: Group NPR 52,160,723 thousand, up from NPR 33,075,128 thousand — a NPR 19bn increase. The cash flow statement corroborates: purchases of investment securities of NPR 1,039bn against sales of NPR 1,020bn, i.e. very high churn in short-dated government paper with a net build of ~NPR 19bn. This is what drove the fall in cash.)
Effect on P&L. Interest income (amortised cost and FVOCI-debt); fair value changes (FVTPL); dividend income; realised gains on FVOCI-debt disposal. Effect on OCI. Fair value movements on FVOCI instruments, plus related deferred tax. Effect on equity. Through the fair value reserve. Effect on cash flow. Purchases and sales appear in investing activities. Effect on regulatory ratios. Government securities generally carry low or zero risk weight, so a shift from loans into government paper reduces RWA and mechanically improves capital adequacy — while reducing yield. They are also central to the NLA liquidity ratio.
Analyst interpretation.
- A sharp rise in government securities with flat loans = defensive posture, weak credit demand, margin compression ahead, but improving capital ratios.
- The reverse = risk appetite returning.
- Very high purchase and sale volumes with a small net change (as in NMB's case) is normal treasury rollover of short-dated bills, not strategy change.
Related terms. Other trading assets · Part 3 Fair value reserve, Gains/(losses) from investments in equity instruments measured at fair value · Part 4 Purchase / Receipts from sale of investment securities · Part 8 FVTPL, Fair value hierarchy, Amortised cost, Business model · Part 6 Liquidity Ratio (NLA)
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