Chapter 6 · Part 6 — NRB Ratios and Performance Ratios
Net NPL, coverage, cost of funds, CD ratio and base rate
The trio you must always read together, the coverage-normalisation calculation, and NRB's mandated lending-rate formula.
Net Non performing loan (NPL) to total loan
Simple definition. Bad loans left over after subtracting what the bank has already set aside against them — the credit hole that is still open.
Technical definition. Non-performing loans net of the loan-loss provision held against them, expressed as a percentage of total loans, computed per NRB's prescribed methodology.
Exact formula
Gross NPL − Loan Loss Provision held against NPL
Net NPL Ratio = ──────────────────────────────────────────────────── × 100
Total Loans and Advances (net)Example calculation. Illustrative — HCBL, showing both conventions.
Gross loans NPR 100,000,000,000 Gross NPL NPR 2,000,000,000 Total loan loss provision NPR 1,500,000,000 Net NPL (numerator) = 2,000,000,000 − 1,500,000,000 = NPR 500,000,000 Convention A — over NET loans: Net loans = 100,000,000,000 − 1,500,000,000 = 98,500,000,000 Net NPL = 500,000,000 ÷ 98,500,000,000 × 100 = 0.51% Convention B — over GROSS loans: Net NPL = 500,000,000 ÷ 100,000,000,000 × 100 = 0.50% Small difference here; it widens as provisions grow.
Reading NMB's actual numbers — and the puzzle inside them.
Gross NPL Coverage Net NPL Bank FY2082/83 4.91% 92.57% 1.66% Bank FY2081/82 4.11% 98.38% 1.58% Group FY2082/83 5.18% 88.04% 1.92% Group FY2081/82 4.51% 98.79% 1.98%
Interpretation.
LOW net NPL → bad loans are well provided for; limited further
P&L damage to come
HIGH net NPL → a large unprovided credit hole; future impairment
charges are likelyRegulatory significance. A key supervisory indicator of residual credit risk. It directly represents potential future capital erosion — every rupee of unprovided NPL is a rupee that may have to be charged to profit later.
Investor/analyst significance. Compare net NPL to CET1 capital:
Illustrative stress test: Unprovided NPL (Bank) ≈ 249,759,929 × 1.66% ≈ NPR 4,146,000 thousand If ALL of it had to be provided: • Pre-tax profit impact −NPR 4,146,000 thousand • Against a pre-tax profit of NPR 5,748,026 thousand → would consume ~72% of a year's pre-tax profit
That is a meaningful, though survivable, exposure — and exactly the kind of scenario an analyst should quantify rather than describe.
Limitations.
- Denominator convention varies (above).
- Assumes the provision held is adequate — if it is not, net NPL understates the hole.
- Ignores collateral. A poorly-provided NPL fully secured by prime real estate is less dangerous than a well-provided unsecured one. Collateral quality is not visible in this ratio.
- Subject to the same write-off and NBA distortions as gross NPL.
Related terms. NPL ratio · Provision coverage · Part 2.11
Total loan loss provision to Total NPL (Provision Coverage Ratio)
Simple definition. How much of the bad loans the bank has already set money aside for.
Technical definition. Total loan-loss provision held, expressed as a percentage of gross non-performing loans, computed as per NRB Directives.
Exact formula
Total Loan Loss Provision
Provision Coverage Ratio = ──────────────────────────── × 100
Gross NPLNote the numerator. The label says "Total loan loss provision to Total NPL (As per NRB Directives)" — the numerator is total provision, including provision held against Pass and Watchlist loans, not only the provision against NPL. This is why coverage can exceed 100%.
Example calculation. Illustrative — HCBL.
Total loan loss provision NPR 1,500,000,000 Gross NPL NPR 2,000,000,000 Coverage = 1,500,000,000 ÷ 2,000,000,000 × 100 = 75.00% → 25% of recognised bad loans are unprovided. The bank is relying on collateral recovery for that portion.
Reading NMB's actual numbers — the most concerning figure in the table.
FY2082/83 FY2081/82 Change Bank 92.57% 98.38% −5.81pp Group 88.04% 98.79% −10.75pp
The Group coverage fell nearly 11 percentage points in one year, while NPL rose. This is the combination flagged earlier as the worst of the four:
NPL ▲ 4.51% → 5.18%
Coverage ▼ 98.79% → 88.04%
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More bad loans, proportionally LESS provided for.Quantify it. If NMB Group had maintained 98.79% coverage on its Asar 2083 NPL:
Group gross loans ≈ 258,399,832 thousand
NPL at 5.18% ≈ 13,385,111 thousand
Provision at 88.04% coverage ≈ 11,784,232 thousand (actual)
Provision at 98.79% coverage ≈ 13,223,131 thousand (prior-year standard)
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Additional provision required ≈ 1,438,899 thousand
→ ~NPR 1.44 billion of additional impairment charge would have
been needed to hold coverage flat. Against a Group pre-tax
profit of NPR 6,115,361 thousand, that is 23.5% of pre-tax profit.This is the single most important analytical calculation in Part 6. It puts a number on what maintaining prior-year provisioning discipline would have cost.
Higher vs lower.
HIGHER coverage → more conservative; less future P&L risk
→ BUT depresses current profit
→ Above 100% means provisions exceed NPL, because
the bank also provides against Pass/Watchlist loans
LOWER coverage → higher current profit
→ BUT more unprovided risk carried forward
→ vulnerable to a sharp catch-up charge laterRequired level. NRB does not prescribe a single coverage ratio; coverage emerges from the grade-by-grade provisioning percentages in the Unified Directives applied to the bank's actual classification mix, and from the NFRS 9 higher-of rule. A falling coverage ratio can therefore be a mix effect (more NPL sitting in Substandard, which carries a lower rate) rather than under-provisioning. Check the classification note before concluding.
Investor/analyst significance. Coverage is the best single measure of provisioning conservatism. A bank that lets coverage slide is, in effect, borrowing profit from future periods.
Limitations.
- Numerator definition varies — total provision vs NPL-specific provision. NRB uses total.
- Ignores collateral. A bank lending only against prime collateral rationally holds lower coverage.
- Mix-sensitive — a shift between NPL grades moves coverage without any change in provisioning policy.
- Can be managed by the timing of write-offs.
Related terms. NPL ratio · Net NPL · Part 2.11 Impairment charge · Part 7 Short loan loss provision in accounts
Cost of Funds (LCY YTD)
Simple definition. The average interest rate the bank pays for the money it uses.
Technical definition. The weighted average cost of interest-bearing local-currency funds, computed year-to-date per NRB's prescribed methodology, expressed as a percentage per annum.
Decoding the label.
- LCY = Local Currency (Nepali rupee). Foreign-currency funding is excluded.
- YTD = computed on the cumulative period from Shrawan 1, not just the quarter.
Formula (analytical form)
Total interest expense on local currency funds
Cost of Funds = ──────────────────────────────────────────────────── × 100
Average interest-bearing local currency fundsReading NMB's numbers.
FY2082/83 FY2081/82 Change Bank 3.74% 5.06% −1.32pp Group 3.78% 5.10% −1.32pp A 132 basis point fall — a very large move.
Why it fell. Two forces, both visible elsewhere in the report:
- 1A falling interest-rate environment — deposit rates across the Nepali system declined
- 2Deposit mix — as fixed deposits matured they were replaced at lower rates, and the bank
grew deposits 13.1% while lending grew only ~10%, so it had less need to bid aggressively
The link to the P&L. This 132bp fall is precisely what produced the 18.5% drop in interest expense and hence the 17.5% rise in net interest income (Part 2.3), despite interest income falling 5.5%.
Cost of funds ↓ 132bp
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Interest expense ↓ 18.5% (NPR 14,247m → NPR 11,615m)
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Net interest income ↑ 17.5%
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Operating profit ↑ 29.1%, PAT ↑ 40.6%
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ROE ↑ 9.34% → 11.58%Interpretation.
LOWER cost of funds → cheaper funding, wider potential spread
→ usually reflects a good CASA mix, strong
deposit franchise, or falling market rates
HIGHER cost of funds → expensive funding
→ reliance on fixed deposits or wholesale money
→ margin pressureInvestor/analyst significance. Compare cost of funds across banks — it is the most direct measure of deposit franchise quality. A bank that consistently funds cheaper than peers has a genuine competitive advantage (branch network, CASA, brand). A bank whose cost of funds only falls when market rates fall has no such advantage.
Limitations.
- Excludes foreign-currency funding, which for a bank with DFI borrowings can be material.
- YTD averaging smooths over intra-year rate changes.
- Says nothing about funding stability — cheap wholesale funding can be cheap and fragile.
- Not directly reproducible from published statements.
Related terms. Part 1.21 Deposits from customers · Part 2.2 Interest expense · Base Rate · Average Interest Spread
CD Ratio – Average of the Month
Simple definition. How much of the deposits the bank has lent out.
Technical definition. Total credit (loans and advances) as a percentage of total deposits, computed on a monthly-average basis per NRB's prescribed methodology.
Formula (analytical form)
Total Credit (Loans and Advances)
CD Ratio = ──────────────────────────────────────────── × 100
Total DepositsWhy NRB caps it.
CD ratio too HIGH
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The bank has lent out nearly all its deposits
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Little liquidity left to meet withdrawals
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A deposit run or a liquidity squeeze becomes dangerous
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NRB caps it to force banks to retain a liquidity buffer [R]Nepal has experienced repeated system-wide liquidity crunches in which banks pressed against the CD ceiling, interbank rates spiked, and lending stopped. The cap is a direct response.
Example calculation. Illustrative — HCBL.
Total credit (monthly average) NPR 200,000,000,000 Total deposits (monthly average) NPR 250,000,000,000 CD Ratio = 200,000,000,000 ÷ 250,000,000,000 × 100 = 80.00%
Reading NMB's numbers.
FY2082/83 FY2081/82 Change Both Group & Bank 82.77% 84.33% −1.56pp Cross-check against the balance sheet: Bank loans NPR 249,759,929 thousand Bank deposits NPR 315,118,455 thousand Simple ratio = 249,759,929 ÷ 315,118,455 = 79.26% The published 82.77% differs because it uses NRB's prescribed definition and a monthly-average basis, not year-end balances.
Interpretation.
CD ratio approaching the cap
→ the bank has little room to grow lending
→ it must raise deposits first, competing on rate
→ cost of funds rises, margin compresses
CD ratio well below the cap
→ headroom to lend, which is good
→ BUT idle deposits earn low returns, dragging margin
→ a very low CD ratio can signal weak credit demand
or an inability to find creditworthy borrowersNMB's position, read properly.
CD fell 84.33% → 82.77% because deposits grew 13.1% while loans grew ~10%. → The bank created lending headroom. → The surplus went into government securities (NPR 19bn build). → Consistent with the cash flow statement (Part 4). Interpretation: a DELIBERATE, prudent choice — build funding ahead of lending. It costs some margin now but gives room to grow, and it improves liquidity. Given rising NPL, being less aggressive on lending is defensible.
Regulatory significance. Exceeding the cap is a breach that attracts supervisory action [R]. Banks manage this ratio actively, especially at month ends.
Investor/analyst significance. The best single indicator of growth headroom. A bank at the cap cannot grow its loan book without first growing deposits — which means competing on deposit rates and compressing margins.
Limitations.
- Monthly-average basis can be managed at month ends.
- Says nothing about the maturity mismatch between loans and deposits — a bank could be at
70% CD and still be dangerously mismatched.
- Ignores non-deposit funding.
- The definition changes [R] (CCD → CD), breaking time series.
Related terms. Part 1.7 Loans and advances · Part 1.21 Deposits from customers · Liquidity Ratio (NLA) · Part 4.10, 4.11
Base Rate – Average for the quarter
Simple definition. The minimum rate below which the bank will not lend — its cost floor plus a regulated margin.
Technical definition. The benchmark lending rate computed under NRB's prescribed base rate formula, representing the bank's cost of funds plus prescribed operating cost, cost of statutory requirements and a return-on-assets component, averaged over the quarter.
Formula (conceptual structure)
Base Rate = Cost of Funds
+ Cost of Cash Reserve Ratio (CRR)
+ Cost of Statutory Liquidity Ratio (SLR)
+ Operating Cost
+ Return on Assets componentWhy NRB mandates a base rate at all.
PROBLEM: Banks were lending at opaque, negotiated rates.
Borrowers could not compare. Pricing was arbitrary.
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SOLUTION: Every bank must compute a base rate on the SAME formula
and publish it.
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• Lending rate = Base Rate + Premium (risk-based margin)
• Borrowers can compare base rates across banks
• NRB can monitor whether premiums are excessive
• Banks generally may not lend below base rate [R]Reading NMB's numbers.
FY2082/83 FY2081/82 Change
Both Group & Bank 5.11% 6.22% −1.11pp
Compare to cost of funds:
Cost of funds 3.74% 5.06% −1.32pp
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Base rate − CoF 1.37pp 1.16pp +0.21ppInterpretation.
LOWER base rate → the bank can offer cheaper loans
→ more competitive, wins business
→ reflects low cost of funds and efficiency
HIGHER base rate → expensive funding or high operating cost
→ loses price-sensitive borrowersInvestor/analyst significance.
- Compare base rates across banks — it is a directly comparable efficiency and funding-cost measure precisely because the formula is mandated.
- A bank with a persistently low base rate has a structural advantage in winning good-quality, price-sensitive corporate borrowers.
- The base rate trend predicts lending-rate trends, and hence interest income.
Limitations.
- It is a floor, not the actual lending rate. Actual rates are base + premium, and the premium is where risk pricing happens. A low base rate with high premiums is not cheap lending.
- Formula-driven, so it can move for regulatory reasons unrelated to the bank's economics [R].
- Quarterly average smooths intra-quarter movement.
Related terms. Cost of Funds · Average Interest Spread · Part 2.1 Interest income · Part 12 Nepal Rastra Bank
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