Deposits, borrowings, debentures and share capital

Borrowing

Simple definition. Money the bank has borrowed from lenders other than depositors and other than through issued debentures.

Technical definition. Financial liabilities arising from borrowings — from foreign financial institutions, multilateral and development finance institutions, and domestic lenders — measured at amortised cost using the effective interest method.

Nepalese context. This is where development finance appears. The source report's cover identifies NMB as a joint-venture partner of FMO (the Dutch entrepreneurial development bank) and a member of the Global Alliance for Banking on Values. Nepali banks borrow from institutions such as FMO, IFC, ADB-linked facilities and other DFIs, typically:

• In foreign currency, creating FX risk that is usually hedged with the forward and swap contracts sitting in the derivative lines
• With earmarked purposes — SME lending, energy, women-owned enterprise, climate finance
• At longer tenors than deposits, which improves structural liquidity

Group vs Bank. (NMB, Asar 2083: Group NPR 5,427,614 thousand vs Bank NPR 1,926,875 thousand.) The Group figure is nearly three times the Bank figure because the microfinance subsidiary borrows heavily — including from the parent bank itself, an amount eliminated in the Group figure. Cross-check with the related-party note: Borrowing from NMB Bank Ltd. by NMB Laghubitta = NPR 2,591,889 thousand.

Measurement. Initially fair value net of transaction costs; subsequently amortised cost. FX-denominated borrowings are retranslated at each reporting date, with differences to P&L.

Effect on P&L. Interest expense; FX retranslation to Other operating income. Effect on cash flow. Movements in borrowings appear under financing activities (Receipt from issue of debt securities, Repayment of debt securities) or, for some short-term borrowing, within operating movements — see Part 4. Effect on regulatory ratios. Ordinary borrowing is not regulatory capital. Only borrowing that meets the subordination and loss-absorbency criteria qualifies as Tier 2 — see Subordinated Liabilities.

Analyst interpretation. DFI borrowing is generally a positive quality signal: it implies the bank passed an international lender's due diligence, and it lengthens the funding profile. But check the currency and whether it is hedged — an unhedged foreign-currency borrowing in a depreciating-NPR environment is a real loss.

Related terms. Debt securities issued · Subordinated Liabilities · Derivative financial instruments · Part 4 (financing activities)

Current Tax Liabilities

Simple definition. Income tax the bank owes for the period but has not yet paid.

Technical definition. The amount of income tax payable in respect of taxable profit for the current and prior periods, measured at the amount expected to be paid using tax rates enacted or substantively enacted at the reporting date (NAS 12).

Recognition. When taxable profit arises and the tax has not been settled. Debit/credit nature. Credit (liability). Offsetting. Only against current tax assets where a legally enforceable right of set-off exists and the entity intends to settle net — see 1.9.

*(NMB, Asar 2083: Group NPR 99,341 thousand, Bank nil. The Bank has a current tax asset of NPR 97,598 thousand while the Group has a current tax liability — the two belong to different entities and cannot be offset.)*

Journal entry.

Dr  Income tax expense — current tax    450,000,000
    Cr  Current tax liability                        450,000,000

On payment:
Dr  Current tax liability               450,000,000
    Cr  Cash                                         450,000,000

Effect on cash flow. Income taxes paid under operating activities.

Related terms. Current tax assets · Part 2 Current Tax · Part 8 Current Income Tax

Provisions

Simple definition. Amounts set aside for obligations the bank knows it has but cannot measure exactly or does not yet know when it must pay.

Technical definition. Liabilities of uncertain timing or amount, recognised under NAS 37 when all three conditions are met, as the source report sets out: "The Bank creates a provision when there is a present obligation as a result of past events that probably requires an outflow of resources and a reliable estimate can be made of the amount of the obligation."

The three-part test and the decision tree.

       Is there a PRESENT OBLIGATION from a PAST EVENT?
                         │
          ┌──────────────┴──────────────┐
         NO                            YES
          │                             │
          ▼                             ▼
   Is there a POSSIBLE       Is an OUTFLOW of resources
   obligation?                        PROBABLE?
          │                             │
   ┌──────┴──────┐            ┌─────────┴─────────┐
  NO            YES          NO                  YES
   │             │            │                   │
   ▼             ▼            ▼                   ▼
Nothing     Is outflow    Is outflow      Can the amount be
recognised  REMOTE?       REMOTE?         RELIABLY ESTIMATED?
or          │             │                       │
disclosed   ├─ Yes → nothing                ┌─────┴─────┐
            └─ No  → DISCLOSE as           NO          YES
                     CONTINGENT             │           │
                     LIABILITY              ▼           ▼
                                      DISCLOSE as   RECOGNISE
                                      contingent    A PROVISION
                                      liability

Typical provisions in a Nepali bank.

• Legal claims and litigation (the report's Details of Legal Action note addresses this)
• Onerous contracts
• Restructuring costs, where a constructive obligation exists
• Staff-related obligations not covered by actuarial employee-benefit provisions

Important scope note. Loan-loss provisions are not NAS 37 provisions. They are impairment allowances under NFRS 9, presented as a deduction from the loan asset, not as a liability. This is a frequent source of confusion because Nepali banking language calls both "provision."

"PROVISION" in a Nepali bank means two different things:

(a) Loan-loss provision       → NFRS 9 / NRB impairment
                              → CONTRA-ASSET, netted against loans
                              → Part 1.7, Part 8 (ECL)

(b) Provisions (NAS 37)       → LIABILITY line on the balance sheet
                              → uncertain obligations, legal claims
                              → this section

Contingent assets. The report states: "Contingent assets are not recognised in the financial statements. However, contingent assets are assessed continually and if it is virtually certain that an economic benefit will arise, the asset and related income are recognised." Note the asymmetry — a probable outflow creates a liability, but only a virtually certain inflow creates an asset. This is prudence built into the standard.

(NMB, Asar 2083: Group NPR 7,810 thousand, Bank nil — immaterial.)

Related terms. Part 8 Provisions, Contingent Liabilities, Contingent Assets, Present obligation · Part 11 Case filed by or against the organized institution

Deferred tax liabilities

Simple definition. Tax the bank will have to pay in future because it has already recognised income (or claimed deductions) ahead of the tax rules.

Technical definition. The amounts of income taxes payable in future periods in respect of taxable temporary differences, recognised under NAS 12 without a probability test — unlike deferred tax assets, DTLs are recognised in full.

Formula.

Deferred tax liability  =  Taxable temporary difference  ×  Enacted tax rate

Typical sources in a Nepali bank.

Worked example. Continuing the FVOCI illustration from 1.8:

Fair value gain on FVOCI equity                NPR 8,000,000
Tax rate (illustrative [R])                              30%
                                               ─────────────
Deferred tax liability                         NPR 2,400,000

Dr  OCI — Income tax relating to above items    2,400,000
    Cr  Deferred tax liability                             2,400,000

Because the gain went to OCI, the deferred tax on it goes to OCI too. Tax follows the item it relates to. That principle explains every "Income tax relating to above items" line in Part 3.

Offsetting with DTA. Only where legally enforceable set-off exists and the amounts relate to the same taxation authority and same taxable entity — see 1.15.

(NMB, Asar 2083: Group NPR 12,883 thousand, Bank nil — the DTL sits in a subsidiary.)

Effect on regulatory capital. DTLs may be permitted to offset DTAs in the capital computation in some frameworks [R] — check the applicable Capital Adequacy Framework.

Related terms. Deferred tax assets · Part 3 Income tax relating to above items · Part 8 Deferred Tax

Other liabilities

Simple definition. Everything owed that does not fit the named liability lines.

Technical definition. A residual caption comprising accrued expenses, interest payable, staff-benefit obligations, lease liabilities under NFRS 16, sundry payables, and amounts held pending settlement.

What is inside it in a Nepali bank.

The actuarial connection. The three leave/gratuity provisions are measured by an actuary under NAS 19, and remeasurement gains and losses go to OCI, not profit — which is why the source report's OCI shows Actuarial gains/(losses) on defined benefit plans of NPR (58,594) thousand at Group level. The report confirms: "The actuary valuation is done on annual basis only."

(NMB, Asar 2083: Group NPR 9,822,111 thousand vs NPR 23,336,968 thousand a year earlier — a NPR 13.5bn fall, which is a very large movement in a residual line and would justify reading the supporting note.)

Effect on cash flow. Appears as Increase/(Decrease) in operating liabilities — Other liabilities; the source report shows Group NPR (4,330,702) thousand, a substantial operating outflow.

Related terms. Part 3 Actuarial gains/(losses) · Part 8 NAS 19, NFRS 16, Lease liabilities, Gratuity, Accumulated sick leave, Accumulated home leave

Debt securities issued

Simple definition. Bonds and debentures the bank has issued to investors to raise long-term funding.

Technical definition. Financial liabilities arising from issued debt instruments, measured at amortised cost using the effective interest method, with issue costs deducted from the initial carrying amount and amortised over the term through interest expense.

Nepalese context. Nepali commercial banks issue debentures listed on NEPSE, typically 5–10 year tenor, with a fixed coupon paid semi-annually. Investors are largely institutions, mutual funds and retail. Debenture issuance in Nepal has been driven by:

1. 1Tier 2 capital — a qualifying subordinated debenture counts toward supplementary

capital [R], easing capital adequacy pressure without diluting shareholders

1. 1Term funding — deposits are short; debentures are long, improving structural

liquidity

1. 1NRB has at times required banks to raise debt as a proportion of capital [R]

The source report shows the associated machinery: a Capital (Debenture) Redemption Reserve appropriation in the distributable profit statement (NPR 621,825 thousand) and a Debenture RTS Fee payment to NMB Capital in the related-party note.

Journal entries.

Issue NPR 3,000,000,000 of 10-year 9% debenture, issue costs NPR 30,000,000:
Dr  Cash                              2,970,000,000
    Cr  Debt securities issued                     2,970,000,000
        (net of issue costs, which amortise via EIR)

Semi-annual coupon:
3,000,000,000 × 9% × (6/12) = NPR 135,000,000
Dr  Interest expense                    135,000,000
    Cr  Cash / Interest payable                      135,000,000

Annual appropriation to redemption reserve (from SoCE, not P&L):
Dr  Retained earnings                   300,000,000
    Cr  Capital (Debenture) Redemption Reserve        300,000,000

(NMB, Asar 2083: NPR 12,382,000 thousand, essentially unchanged from NPR 12,384,569 thousand — a stable, long-dated funding block.)

Effect on P&L. Interest expense, at a rate typically above deposit rates. Effect on cash flow. Receipt from issue of debt securities / Repayment of debt securities under financing activities. Effect on regulatory ratios. May qualify as Tier 2 capital if it meets subordination and maturity criteria [R]. Note that qualifying amounts are typically amortised out of capital in the final years before maturity — a debenture with two years left may count for much less than its face value. This catches analysts out.

Analyst interpretation. Check the maturity profile. A large debenture maturing within 24 months means (a) refinancing risk and (b) declining Tier 2 recognition, which will pressure the capital adequacy ratio.

Related terms. Subordinated Liabilities · Borrowing · Part 7 Capital (Debenture) Redemption Reserve · Part 12 Tier 2 · Part 6 Capital fund to RWA

Subordinated Liabilities

Simple definition. Borrowings that rank behind depositors and ordinary creditors if the bank fails — the lenders agree to be paid last.

Technical definition. Financial liabilities whose contractual terms subordinate the claim to all other creditors, measured at amortised cost, and eligible for inclusion in supplementary (Tier 2) regulatory capital where they satisfy the criteria in the applicable Capital Adequacy Framework.

Why subordination creates capital.

ORDER OF CLAIMS IF A BANK FAILS
────────────────────────────────
1. Depositors and secured creditors      ← paid FIRST
2. Ordinary unsecured creditors
3. SUBORDINATED debt holders             ← paid after everyone above
4. AT1 / preference shareholders
5. Ordinary shareholders                 ← paid LAST (usually nothing)

Because holders at level 3 absorb losses BEFORE depositors do,
the regulator allows the instrument to count as CAPITAL —
it protects depositors, which is the whole point of capital.

Typical qualifying criteria (all [R] — verify in the applicable framework):

• Minimum original maturity
• Subordination to depositors and general creditors
• No incentive to redeem early; redemption subject to supervisory approval
• Amortisation of eligible amount in the final years to maturity

*(NMB, Asar 2083: nil for both Group and Bank. NMB has instead raised loss-absorbing capital through PNCPS — see 1.31 and Part 7 — which qualifies as Additional Tier 1 rather than Tier 2.)*

Related terms. Debt securities issued · Share capital (PNCPS) · Part 12 Tier 1, AT1, Tier 2, Total regulatory capital

Total liabilities

Simple definition. Everything the bank owes, added up.

Technical definition. The sum of all recognised liabilities.

Formula and reading. (NMB, Asar 2083, Group, NPR thousand.)

Total liabilities        366,496,887
Of which deposits        316,867,875   = 86.5% of total liabilities
                                       = 78.1% of total assets

Total liabilities ÷ Total assets = 366,496,887 ÷ 405,921,893 = 90.3%
→ 90 paisa of every rupee of assets is funded by someone else's money.

Analyst interpretation. The composition matters more than the total. A liability base that is 87% customer deposits is far more stable than one heavily weighted to interbank borrowing and debentures. Compute the deposit share every time.

Related terms. Total Assets · Total equity

EQUITY

Share capital

Simple definition. The money shareholders have put into the bank, recorded at the face value of the shares issued.

Technical definition. The nominal (par) value of issued and fully paid ordinary shares, plus any instrument classified as equity rather than as a financial liability under NAS 32 Financial Instruments: Presentation.

The NAS 32 classification question — debt or equity? The source report states the principle: "The Bank applies NAS 32, Financial Instruments: Presentation, to determine whether funding is either a financial liability (debt) or equity. Issued financial instruments or their components are classified as liabilities if the contractual arrangement results in the bank having a present obligation to either deliver cash or another financial asset, or a variable number of equity shares, to the holder of the instrument."

        DOES THE INSTRUMENT CREATE A CONTRACTUAL
        OBLIGATION TO DELIVER CASH?
                      │
        ┌─────────────┴──────────────┐
       YES                          NO
        │                            │
        ▼                            ▼
FINANCIAL LIABILITY              EQUITY
(e.g. a redeemable,              (e.g. ordinary shares;
 cumulative preference            PERPETUAL, NON-CUMULATIVE
 share with mandatory             preference shares with
 dividends)                       discretionary dividends)

The PNCPS — the most important item in NMB's share capital. The report discloses:

Decode each word, because every one is doing regulatory work:

Share capital movement in the source report.

Share capital, Asar end 2082                    NPR 18,366,706 thousand
+ Bonus shares capitalized                      NPR    918,335 thousand
+ Others (NMB PNCPS 8.25%)                      NPR  3,000,000 thousand
                                                ──────────────
Share capital, Asar End 2083                    NPR 22,285,041 thousand

Note that the bonus share issue of NPR 918,335 thousand is exactly 5% of NPR 18,366,706 thousand, matching the report's disclosure that the bank paid "5% cash dividend and 5% stock dividend" approved by the 30th AGM.

Journal entries.

1. Bonus (stock) dividend — capitalising retained earnings:
Dr  Retained earnings                     918,335,000
    Cr  Share capital                                  918,335,000
→ NO cash moves. Total equity is UNCHANGED.
  Only the composition changes: reserves → paid-up capital.

2. Cash dividend of 5%:
Dr  Retained earnings                     918,335,000
    Cr  Cash                                           918,335,000
→ Cash leaves. Total equity FALLS.

3. PNCPS issue:
Dr  Cash                                3,000,000,000
    Cr  Share capital (PNCPS)                        3,000,000,000

Effect on EPS — this is where bonus shares bite.

EPS = Profit attributable to ordinary equity holders
      ÷ Weighted average number of ORDINARY shares outstanding

A bonus issue increases the share count without increasing resources. NAS 33 therefore requires the share count to be restated retrospectively for all periods presented, as though the bonus shares had always existed. The report confirms: "the number of ordinary shares outstanding before the event is adjusted for the proportionate change... as if the event had occurred at the beginning of the earliest period presented. Hence, bonus share has been adjusted in EPS accordingly."

The PNCPS dividend adjustment to EPS. The report explains the formula used:

                  Annualised earnings  −  PNCPS dividend
Basic EPS  =  ──────────────────────────────────────────────
                     Number of common (ordinary) shares

Worked example using the report's own disclosure. Bank standalone, Asar 2083.

PNCPS dividend for the year = 3,000,000,000 × 8.25% = NPR 247,500,000

Cash Dividend Distributable to PNCPS holders, per the report
                                              = NPR 122,055 thousand
                                              = NPR 122,055,000

Note this is roughly half the full-year 8.25% — consistent with the
PNCPS having been issued and capitalized on Magh 04, 2082, i.e. part-way
through the fiscal year. The dividend is time-apportioned.

Total distributable profit                    NPR 1,872,996 thousand
Less: PNCPS holders                          (NPR   122,055 thousand)
                                              ────────────────────────
Distributable to common equity holders        NPR 1,750,941 thousand OK

That final figure ties exactly to the report's Total Profit Distributable to Common Equity Share holders.

Presentation. Face of the balance sheet within equity; the SoCE shows all movements; the notes disclose authorised/issued/paid-up capital and the PNCPS terms.

Effect on regulatory capital.

                 TIER 1 CAPITAL
                       │
       ┌───────────────┴────────────────┐
       ▼                                ▼
CET 1 (Common Equity Tier 1)      AT1 (Additional Tier 1)
• Ordinary share capital           • PNCPS (NPR 3 bio)
• Share premium
• Retained earnings (eligible)
• Statutory/general reserves
• LESS goodwill, DTA, other
  deductions [R]

The report's ratio table shows this split directly: Tier 1 Capital to RWA 9.90% vs CET 1 Capital to RWA 8.99%. The gap of ~0.91 percentage points is essentially the PNCPS AT1 contribution.

Analyst interpretation. AT1 is genuinely useful capital, but it is not common equity. It carries a dividend cost (8.25% here) that reduces earnings attributable to ordinary shareholders. When comparing banks, compare CET1, not just Tier 1 — CET1 is the purest loss-absorbing layer.

Related terms. Share premium · Retained earnings · Part 3 Basic / Diluted EPS · Part 5 (all movements) · Part 7 Cash Dividend Distributable to PNCPS holders · Part 8 NAS 32, NAS 33, PNCPS · Part 12 CET 1, AT1, Tier 1