Chapter 6 · Part 6 — NRB Ratios and Performance Ratios
Capital adequacy and the NPL ratio
How capital and risk-weighted assets are built, and the loan classification ladder behind every NPL figure.
17 terms. This is the table every Nepali bank must publish, and the one most readers misuse. Two rules before you start:
- 1NRB ratios are computed on NRB's own definitions, which are not the simplified
analytical formulas in a finance textbook. Where the two differ, this Part says so.
- 1Every threshold is regulation-dependent. The formulas below are permanent; the pass
marks are not.
Part 6 checklist
NRB Directive ratios (8): Capital fund to RWA · Non performing loan (NPL) to total loan · Net Non performing loan (NPL) to total loan · Total loan loss provision to Total NPL · Cost of Funds (LCY YTD) · CD Ratio · Base Rate · Average Interest Spread
Additional information (9): Tier 1 Capital to RWA · CET 1 Capital to RWA · Return on Equity (Annualized) · Return on Assets (Annualized) · PE Ratio (Annualized) · Net-Worth per share (NPR) · Assets per share (NPR) · Liquidity Ratio (NLA) · Capital Adequacy Ratio
The published table, and what it is telling you
(NMB, Asar 2083. All figures as published.)
| Ratio | Group FY82/83 | Group FY81/82 | Bank FY82/83 | Bank FY81/82 | Direction |
|---|---|---|---|---|---|
| Capital fund to RWA | 12.66% | 11.94% | 12.73% | 11.92% | ▲ good |
| Non performing loan (NPL) to total loan | 5.18% | 4.51% | 4.91% | 4.11% | ▲ **bad** |
| Net Non performing loan (NPL) to total loan | 1.92% | 1.98% | 1.66% | 1.58% | mixed |
| Total loan loss provision to Total NPL | 88.04% | 98.79% | 92.57% | 98.38% | ▼ **bad** |
| Cost of Funds (LCY YTD) | 3.78% | 5.10% | 3.74% | 5.06% | ▼ good |
| CD Ratio – Average of the Month | 82.77% | 84.33% | 82.77% | 84.33% | ▼ headroom |
| Base Rate – Average for the quarter | 5.11% | 6.22% | 5.11% | 6.22% | ▼ |
| Average Interest Spread | 3.43% | 3.82% | 3.43% | 3.82% | ▼ **bad** |
| Tier 1 Capital to RWA | 9.90% | 9.09% | 9.90% | 9.05% | ▲ good |
| CET 1 Capital to RWA | 9.02% | 9.09% | 8.99% | 9.05% | ▼ slightly |
| Return on Equity (Annualized) | 15.30% | 9.64% | 11.58% | 9.34% | ▲ good |
| Return on Assets (Annualized) | 1.42% | 0.89% | 1.04% | 0.88% | ▲ good |
| PE Ratio (Annualized) | 11.87 | 18.22 | 11.87 | 18.22 | ▼ cheaper |
| Net-Worth per share (NPR) | 185.43 | 177.50 | 181.15 | 174.49 | ▲ |
| Assets per share (NPR) | 2,102.10 | 2,013.29 | 2,060.57 | 1,914.29 | ▲ |
| Liquidity Ratio (NLA) | 28.99% | 27.39% | 28.99% | 27.39% | ▲ good |
The story in one diagram
PROFITABILITY IMPROVED ASSET QUALITY DETERIORATED
────────────────────── ──────────────────────────
ROE 9.34% → 11.58% ▲ NPL 4.11% → 4.91% ▲ worse
ROA 0.88% → 1.04% ▲ Coverage 98.4% → 92.6% ▼ worse
│ │
│ driven by ↓ cost of funds │ more bad loans,
│ (5.06% → 3.74%), NOT by │ provided against
│ lending growth or pricing │ LESS fully
▼ ▼
┌──────────────────────────────────────────────────────────────────┐
│ THE CENTRAL TENSION IN THIS BANK'S YEAR │
│ │
│ Earnings rose because DEPOSITS GOT CHEAPER — a rate-cycle │
│ gift that will not repeat once the deposit book fully │
│ reprices. Meanwhile the loan book is going bad faster than │
│ it is being provided for. │
│ │
│ Note the spread FELL (3.82% → 3.43%) even as cost of funds │
│ fell 132bp — meaning LENDING rates fell even faster. │
│ Competitive pressure is real. │
└──────────────────────────────────────────────────────────────────┘NRB DIRECTIVE RATIOS
Capital fund to RWA (Capital Adequacy Ratio)
Simple definition. How much of the bank's own money stands behind its risk-taking. The single most important number a regulator looks at.
Technical definition. Total regulatory capital fund expressed as a percentage of total risk-weighted assets, computed under NRB's Capital Adequacy Framework, which implements the Basel framework as adapted for Nepal.
Exact formula
Total Capital Fund
Capital Adequacy Ratio (CAR) = ────────────────────────── × 100
Risk Weighted Assets (RWA)Numerator — Total Capital Fund.
┌─────────────────────────────────────────────────────────────┐ │ TIER 1 (Core Capital) │ │ ┌───────────────────────────────────────────────────────┐ │ │ │ CET 1 (Common Equity Tier 1) │ │ │ │ + Paid-up ordinary share capital │ │ │ │ + Share premium │ │ │ │ + General/statutory reserve │ │ │ │ + Retained earnings (eligible portion) │ │ │ │ + Regulatory reserve, other eligible reserves │ │ │ │ − Goodwill [R] │ │ │ │ − Deferred tax assets [R] │ │ │ │ − Investments in financial institutions [R] │ │ │ │ − Other regulatory deductions [R] │ │ │ ├───────────────────────────────────────────────────────┤ │ │ │ AT 1 (Additional Tier 1) │ │ │ │ + PNCPS and similar perpetual, non-cumulative, │ │ │ │ loss-absorbing instruments [R] │ │ │ └───────────────────────────────────────────────────────┘ │ ├─────────────────────────────────────────────────────────────┤ │ TIER 2 (Supplementary Capital) │ │ + Qualifying subordinated debt / debentures [R] │ │ (amortised in the final years to maturity) │ │ + General loan-loss provision, subject to a cap [R] │ │ + Exchange equalisation reserve, other eligible [R] │ ├─────────────────────────────────────────────────────────────┤ │ = TOTAL CAPITAL FUND │ └─────────────────────────────────────────────────────────────┘
Denominator — Risk Weighted Assets.
RWA = Credit RWA + Operational RWA + Market RWA Credit RWA = Σ (Exposure amount × Risk weight for that exposure class [R])
The essential idea: NPR 100 of cash and NPR 100 of an unsecured corporate loan are not the same risk, so they should not require the same capital. Risk weights scale the exposure to its riskiness.
ILLUSTRATIVE risk-weight concept (actual weights are set by NRB's Capital Adequacy Framework [R] — verify): Cash and NRB balances very low / zero weight → little capital needed Government securities very low weight Claims on banks low-moderate Residential mortgage moderate Corporate / SME loans high Overdue / NPL exposures higher Fixed assets high
Unit. Percentage.
Interpretation. Higher = more loss-absorbing capital per unit of risk = safer, but also lower leverage and therefore lower ROE. There is a genuine trade-off:
HIGHER CAR → safer bank, more regulatory headroom to grow
→ BUT lower ROE, because the same profit sits on more equity
LOWER CAR → higher ROE
→ BUT less cushion, and if it breaches the minimum,
NRB can restrict dividends, lending and expansion [R]Example calculation. Illustrative — HCBL.
CET1 components:
Paid-up share capital NPR 20,000,000,000
Share premium NPR 500,000,000
General reserve NPR 6,500,000,000
Retained earnings (eligible) NPR 1,800,000,000
Regulatory reserve NPR 3,500,000,000
──────────────────
Gross CET1 NPR 32,300,000,000
Less: Goodwill (NPR 600,000,000)
Less: Deferred tax asset (NPR 450,000,000)
──────────────────
CET1 NPR 31,250,000,000
AT1: PNCPS NPR 3,000,000,000
──────────────────
Tier 1 capital NPR 34,250,000,000
Tier 2:
Qualifying debentures NPR 4,000,000,000
General loan-loss provision (capped) NPR 1,200,000,000
──────────────────
Tier 2 capital NPR 5,200,000,000
──────────────────
TOTAL CAPITAL FUND NPR 39,450,000,000
Risk Weighted Assets:
Credit RWA NPR 280,000,000,000
Operational RWA NPR 18,000,000,000
Market RWA NPR 2,000,000,000
──────────────────
Total RWA NPR 300,000,000,000
CAR = 39,450,000,000 ÷ 300,000,000,000 × 100 = 13.15%
Tier 1 = 34,250,000,000 ÷ 300,000,000,000 × 100 = 11.42%
CET 1 = 31,250,000,000 ÷ 300,000,000,000 × 100 = 10.42%Reading NMB's actual numbers.
FY2082/83 FY2081/82 Change Capital fund to RWA (Bank) 12.73% 11.92% +0.81pp Tier 1 Capital to RWA 9.90% 9.05% +0.85pp CET 1 Capital to RWA 8.99% 9.05% −0.06pp Derived: Tier 2 = 12.73% − 9.90% = 2.83% AT1 = 9.90% − 8.99% = 0.91% ← the PNCPS
The critical observation. Total capital and Tier 1 both improved — but CET1 actually fell slightly, from 9.05% to 8.99%. The entire improvement came from the NPR 3 billion PNCPS (AT1) issue, not from retained earnings.
What happened:
• Loan book grew ~10% → RWA grew → ratios pushed DOWN
• Profit retained after 55% appropriation and dividends
added only modestly to CET1
• NPR 3bn of AT1 injected → Tier 1 and total capital UP
but CET1 UNCHANGED (AT1 is not CET1)
NET: the bank bought capital headroom rather than earning it.The bank's management analysis confirms the picture: "Capital Adequacy Ratio stands at 12.73%, CET 1 Ratio stands at 8.99% while Tier 1 ratio stands at 9.90%."
Effect of transactions on CAR — the mechanics you must know.
| Transaction | CET1 | RWA | CAR |
|---|---|---|---|
| Profit retained | ↑ | — | ↑ |
| Cash dividend paid | ↓ | — | ↓ |
| Bonus share issue | — | — | **—** (moves within CET1) |
| PNCPS / AT1 issue | — | — | ↑ (via Tier 1) |
| New corporate lending | — | ↑ | ↓ |
| Buying government securities | — | ↑ slightly / — | ↑ or flat |
| Loan becomes NPL | ↓ (via impairment) | ↑ | ↓↓ **double hit** |
| Goodwill recognised | ↓ (deducted) | — | ↓ |
| DTA recognised | ↓ (deducted) | — | ↓ |
| Debenture issued (qualifying) | — | — | ↑ (via Tier 2) |
| Debenture nearing maturity | — | — | ↓ (Tier 2 amortises out) |
Regulatory significance. Breaching the minimum triggers supervisory action — restrictions on dividend distribution, lending growth, branch expansion and, in severe cases, prompt corrective action [R].
Investor/analyst significance.
- Headroom above the minimum determines how much the bank can grow. A bank at the floor cannot lend more without raising capital.
- CET1 is the number that matters most. It is the purest loss-absorbing layer. A bank boosting total capital with AT1 and Tier 2 while CET1 stagnates is not strengthening in the way that counts.
- Compare CET1 across banks, not total CAR.
Limitations of the ratio.
- Risk weights are prescribed, not economic. Two loans with the same weight can have very different actual risk.
- It is a point-in-time measure and can be managed at period ends ("window dressing").
- RWA calculation is not directly verifiable from published statements — you must trust the bank's disclosure.
- It says nothing about liquidity. A well-capitalised bank can still fail on a run.
- Goodwill and DTA deductions mean CAR and accounting equity/assets diverge, sometimes widely.
Related terms. Part 1.30 Share capital · Part 1.36 Total equity · Tier 1 · CET 1 · Capital Adequacy Ratio · Part 12 RWA, Total regulatory capital
Non performing loan (NPL) to total loan
Simple definition. What proportion of the bank's loans have gone bad.
Technical definition. Gross non-performing loans — being loans classified as Substandard, Doubtful and Loss under the NRB loan classification directive — expressed as a percentage of gross total loans and advances.
Exact formula
Non-Performing Loans (gross)
NPL Ratio = ──────────────────────────────── × 100
Total Loans and Advances (gross)Numerator. Substandard + Doubtful + Loss. Denominator. Gross loans and advances, before deducting impairment allowance. Unit. Percentage.
The NRB loan classification ladder
┌──────────────┬────────────────────────────┬─────────────────┐ │ GRADE │ Broad basis │ NPL? │ ├──────────────┼────────────────────────────┼─────────────────┤ │ PASS │ Performing, within terms │ No │ │ WATCHLIST │ Early warning signs │ **No** │ │ SUBSTANDARD │ Overdue beyond a threshold │ YES │ │ DOUBTFUL │ Longer overdue │ YES │ │ LOSS │ Considered unrecoverable │ YES │ └──────────────┴────────────────────────────┴─────────────────┘ The overdue-day thresholds that trigger each downgrade, and the provisioning percentage attached to each grade, are prescribed in the NRB Unified Directives and have been revised repeatedly. VERIFY for your period.
Example calculation. Illustrative — HCBL.
Gross loans and advances NPR 100,000,000,000
Pass NPR 90,000,000,000
Watchlist NPR 8,000,000,000
Substandard NPR 1,000,000,000 ┐
Doubtful NPR 600,000,000 ├ NPL
Loss NPR 400,000,000 ┘
─────────────
NPL NPR 2,000,000,000
NPL Ratio = 2,000,000,000 ÷ 100,000,000,000 × 100 = 2.00%Reading NMB's actual numbers.
FY2082/83 FY2081/82 Change Bank standalone 4.91% 4.11% +0.80pp (+19.5% relative) Group 5.18% 4.51% +0.67pp The Group ratio is HIGHER than the Bank's — meaning the subsidiaries (principally microfinance) have worse asset quality than the parent bank.
Quantifying the deterioration.
Bank gross loans ≈ NPR 249,759,929 thousand
NPL at 4.91% = 249,759,929 × 4.91% ≈ NPR 12,263,213 thousand
NPL at 4.11% = 228,456,304 × 4.11% ≈ NPR 9,389,554 thousand
────────────────────
Increase in absolute NPL ≈ NPR 2,873,659 thousand
→ Nearly NPR 2.9 billion of additional bad loans in one year.Higher vs lower.
LOWER NPL → better underwriting, better collection
→ BUT could also mean aggressive write-offs, or
restructuring that postpones recognition
HIGHER NPL → deteriorating credit quality
→ more impairment charges ahead
→ interest accrual stops on Stage 3 → income pressure
→ higher risk weights → capital pressureNever read NPL alone. It must be read as a trio with coverage and net NPL:
NPL ↑ + Coverage ↓ = the worst combination. More bad loans,
less provided for. NMB is here.
NPL ↑ + Coverage ↑ = recognising problems and providing for them.
Painful but honest.
NPL ↓ + Coverage ↓ = suspicious. Check for write-offs and
NBA takeovers (Part 1.12).
NPL ↓ + Coverage ↑ = genuine improvement.Required level. NRB does not set a universal "maximum NPL" but uses NPL as a key supervisory indicator, and elevated NPL can trigger restrictions and heightened supervision. Sector norms and supervisory tolerance are matters for the directives and NRB's supervisory framework.
Regulatory significance. Drives provisioning requirements, affects risk weights, and is a core supervisory metric. NMB's own management analysis flags it: "NPA level has increased to 4.91% from 4.11% as compared to previous quarter."
Investor/analyst significance. The leading indicator of future impairment charges. Credit problems typically surface 12–24 months after origination, so today's NPL reflects lending decisions made one to two years ago — and today's aggressive lending will show up in NPL later.
Limitations of the ratio.
- Classification is rules-based, not economic. A loan can be 89 days overdue and still be Pass [R].
- Restructuring and rescheduling can reset the clock, keeping a troubled loan out of NPL.
- Write-offs reduce both numerator and denominator, flattering the ratio.
- Transfer to Non-Banking Assets removes the loan entirely — the credit loss happened but the NPL ratio improves (Part 1.12).
- It is a stock measure — it says nothing about the rate of new problem formation. For that, look at the movement in the classification note and at credit cost.
- Not comparable across jurisdictions with different classification rules.
Related terms. Part 1.7 Loans and advances to customers · Part 1.12 Investment property · Part 2.11 Impairment charge · Net NPL · Provision coverage · Part 8 ECL
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