Chapter 7 · Part 7 — Directed Lending and the Full Screen
Directed Lending and the Full Screen
The mandate columns, then the whole week assembled into a ten-minute screen across every institution.
The last family of columns, and then the point of the week: assembling six days of ratios into a single repeatable screen you can run on every institution in about ten minutes.
What directed lending is
A commercial bank in Nepal is not free to lend wherever the return is best. NRB requires a minimum share of the loan book to go to named sectors, on the view that a banking system funded by the whole country should finance the whole country's economy — not only the parts that are easiest to underwrite.
The bank sheet breaks this out into six columns plus a total:
PRESCRIBED SECTOR LENDING — the six columns ┌────────────────────────────────────────────────────────────┐ │ 1 Agriculture │ │ 2 Tourism │ │ 3 MCSMI — Micro, Cottage, Small and Medium Industries │ │ 4 Energy │ │ 5 IT and Communication │ │ 6 Export Industries based on Domestic Raw Materials │ ├────────────────────────────────────────────────────────────┤ │ TOTAL PRESCRIBED SECTOR LOAN (% of total loan) │ └────────────────────────────────────────────────────────────┘ Each is expressed as a percentage of the bank's total loan.
The finance-company sheet uses different categories:
CLASS "C" DIRECTED LENDING
Deprived Sector % lending to the defined deprived group
Specified Sector % "Lending in Agriculture, Micro, Cottage
and small industry/enterprise, Energy
and Tourism" — the sheet's own footnoteThe picture at Chaitra end 2082
TOTAL PRESCRIBED SECTOR LOAN — commercial banks (% of total loan) ADBL 60.34 ████████████████████████████████████ Kumari 51.90 ███████████████████████████████ RBB 41.51 █████████████████████████ Prime Commercial 40.96 ████████████████████████ Nepal SBI 39.48 ████████████████████████ Citizens 38.90 ███████████████████████ Machhapuchhre 38.63 ███████████████████████ Siddhartha 38.51 ███████████████████████ NIMB 37.49 ██████████████████████ Prabhu 37.36 ██████████████████████ ────────── system 38.85 ────────────────────────── Sanima 36.93 ██████████████████████ Nabil 36.89 ██████████████████████ Nepal Bank 36.68 ██████████████████████ Laxmi Sunrise 36.52 ██████████████████████ Global IME 36.16 █████████████████████ Everest 35.97 █████████████████████ NMB 35.19 █████████████████████ Himalayan 32.47 ███████████████████ NIC Asia 32.15 ███████████████████ Standard Chartered 31.04 ██████████████████ Range 31.04% to 60.34%. Roughly two rupees in five of all commercial bank lending in Nepal is directed.
Two names stand out for reasons the rest of the sheet explains.
Agriculture Development Bank at 60.34% is not remarkable — it is the institution's purpose. Its agriculture column alone is 26.71%, more than double any other bank, and its MCSMI is 21.73%. The mandate is the business model.
Standard Chartered at 31.04%, the lowest, is consistent with everything else in its row: the lowest CD ratio, the highest liquidity, the highest capital, the cleanest book. A bank that lends least overall also has the least directed lending in absolute terms, and sits at the bottom of the mandate range.
Why the mandate columns matter to an investor
Directed lending is not a footnote. It has three concrete effects on the numbers you have spent the week learning.
HOW THE MANDATE FEEDS BACK INTO EVERY OTHER COLUMN
┌─────────────────────────┐
│ Must lend X% to │
│ prescribed sectors │
└───────────┬─────────────┘
│
┌────────┼────────┬──────────────────┐
▼ ▼ ▼ ▼
┌──────┐ ┌──────┐ ┌────────┐ ┌──────────┐
│ NPL │ │ RISK │ │ BASE │ │ CONCEN- │
│ │ │WEIGHT│ │ RATE │ │ TRATION │
└──────┘ └──────┘ └────────┘ └──────────┘
NPL: some prescribed sectors are structurally harder
to underwrite and monitor — smaller tickets,
thinner records, weather and cycle exposure
RISK the weights applied to these exposures feed
WEIGHT: straight into RWE, and therefore into CCAR [R]
BASE priced lending to mandated sectors interacts
RATE: with the cost base
CONCEN- a bank at 60% directed lending has 60% of its
TRATION: book exposed to the same policy environmentSo when you see a bank with both a high mandate percentage and a rising NPL, they may not be independent facts. And when the government or NRB changes the required percentages, it changes the risk profile of every bank on the sheet at once — which is why these columns belong in your screen and not in the appendix.
The finance-company view
DEPRIVED AND SPECIFIED SECTOR — Class "C", Chaitra end 2082 company Deprived % Specified % ───────────────────────────────────────────────────── Progressive Finance 7.03 39.72 Samriddhi Finance 8.76 36.42 Janaki Finance 3.98 28.31 Multipurpose Finance 5.84 26.40 ICFC Finance 5.38 24.57 Manjushree Finance 5.72 24.19 Reliance Finance 5.01 23.32 Goodwill Finance 5.24 22.73 Gorkhas Finance 8.89 19.89 Pokhara Finance 4.84 17.30 Nepal Finance 5.04 15.14 Shree Investment 5.26 14.97 Best Finance 6.49 12.24 Guheshwori Merchant 6.14 12.84 Central Finance 5.50 10.74 ───────────────────────────────────────────────────── Total 5.80 21.96
Note the tight clustering of the deprived-sector column — thirteen of fifteen between 4.8% and 8.9% — against a specified-sector column that ranges from 10.74% to 39.72%. A tight distribution against a requirement, a loose one where there is discretion. Same signature you saw in the spread column on Day 6.
Building the screen
Here is the week assembled. Five questions, in supervisory order, each answered by columns you now understand.
┌─────────────────────────────────────────────────────────────────────┐ │ THE TEN-MINUTE KFI SCREEN │ ├─────────────────────────────────────────────────────────────────────┤ │ │ │ 1. SOLVENCY Read CCAR, not CAR. │ │ Compute CAR − CCAR: how much is Tier 2? │ │ RED FLAG: CCAR near or below the minimum [R] │ │ a gap above ~4 pp │ │ any negative value │ │ │ │ 2. LIQUIDITY Read net liquidity against the 20% floor. [R] │ │ Read CD ratio against the 90% ceiling. [R] │ │ RED FLAG: net liquidity in the bottom quartile │ │ AND CD ratio in the top quartile │ │ (working hard with no cushion) │ │ │ │ 3. ASSET QUALITY Read NPL, then Net NPL, then coverage. │ │ coverage = (NPL − NetNPL) ÷ NPL │ │ RED FLAG: coverage below peers — the loss is │ │ still to come through the P&L │ │ │ │ 4. PRICING Read base rate against peers, spread against │ │ the top of the distribution. │ │ RED FLAG: high base rate AND low spread — │ │ expensive funding, no margin │ │ │ │ 5. MANDATE Read total prescribed sector %. │ │ ASK: does a high figure explain the NPL? │ │ │ │ THEN: read the row ACROSS. One bad column is a question. │ │ Three bad columns pointing the same way is an answer. │ └─────────────────────────────────────────────────────────────────────┘
A worked screen — all twenty banks
Below is one way to combine the five families into a single resilience score. The weights are a choice, not a truth. They are shown so you can disagree with them and change them — that is the point of building your own screen rather than accepting someone else's.
WEIGHTS USED (percentile rank within the 20 banks) 30% CCAR higher is better 25% Net NPL lower is better 20% Net liquidity higher is better 15% Provision coverage higher is better 10% CD ratio lower is better This is a RESILIENCE screen. It contains no earnings, no valuation, no growth and no price. It cannot tell you what to buy. It tells you which balance sheets have the most room to absorb a surprise.
RESILIENCE SCREEN — commercial banks, Chaitra end 2082 bank CCAR NetLiq NetNPL Cov% CD score ──────────────────────────────────────────────────────────────────── Standard Chartered 16.14 53.84 0.37 79.6 53.84 93.4 Agriculture Dev Bank 11.32 38.29 1.31 74.1 64.32 72.9 Global IME 9.71 40.39 0.69 86.1 71.03 72.6 Nepal Bank 10.37 41.03 1.32 73.4 66.76 71.1 Nepal SBI 9.25 38.75 0.23 90.9 67.68 67.4 NIC Asia 6.48 43.91 0.49 94.5 66.47 62.4 Siddhartha 10.66 31.78 1.18 68.2 78.06 58.4 Machhapuchhre 10.17 32.36 1.22 69.6 77.64 56.3 Rastriya Banijya 9.21 47.01 1.35 69.9 57.71 54.5 Nabil 9.69 28.92 0.98 77.6 79.50 50.8 NIMB 9.70 40.58 2.28 72.9 68.51 49.7 Laxmi Sunrise 9.59 30.11 1.39 73.7 77.06 42.9 Prabhu 8.57 40.01 1.71 80.7 70.61 41.6 Everest 9.58 26.74 0.22 63.9 82.61 41.3 Himalayan 7.70 34.53 1.48 81.5 75.01 39.2 Sanima 10.03 27.55 1.49 62.7 82.78 35.0 NMB 9.76 26.32 1.77 64.2 84.68 29.2 Prime Commercial 9.69 25.63 1.94 69.6 83.12 24.2 Kumari 9.12 33.68 2.69 61.2 77.17 20.0 Citizens 8.93 28.60 2.37 65.2 82.27 15.5 ────────────────────────────────────────────────────────────────────
Three things to notice, because they are what a screen is for.
NIC Asia ranks sixth. The bank with the worst gross NPL and the lowest CCAR on the sheet lands in the top third — because it has provided for 94.5% of its bad loans and holds strong liquidity. A single-column view would have put it last. Whether you agree depends on how much weight you give recognised losses versus remaining capital; change the weights and watch it move.
Everest ranks fourteenth despite the best asset quality in the system. NPL of 0.61% and Net NPL of 0.22% are outstanding — but net liquidity of 26.74% and a CD ratio of 82.61% put it near the bottom on the liquidity dimension. Clean book, thin cushion.
The bottom five share one pattern. Citizens, Kumari, Prime, NMB and Sanima all combine below-median liquidity with above-median CD ratios and weak coverage. Not a crisis, but the same posture: lent out, thinly provided, less room.
What this screen deliberately does not do
Be as clear about the limits as about the method.
- It contains no profit, no valuation, no price. A resilient bank at three times book and a fragile bank at half book are not comparable on this screen, and it will never tell you which is the better investment.
- It is one date. Every ratio here is a level. Run the screen on four consecutive releases and the direction will tell you more than any single score.
- It uses provisional, unaudited, regulatory-format figures. Day 1's three disclaimers apply to every number above.
- The weights are arbitrary. Yours should be different if your concerns are different.
- It is not advice, and nothing in this course is a recommendation to buy or sell any security.
The week in one page
┌──────────────┬────────────────────────────────┬─────────────────────┐ │ DAY 1 │ The KFI table │ three disclaimers │ │ │ provisional, regulatory │ five families │ │ │ format, monthly averages │ │ ├──────────────┼────────────────────────────────┼─────────────────────┤ │ DAY 2 │ Tier 2 = TCF − Core │ capital is not │ │ capital │ RWE = Core ÷ CCAR │ cash; core is not │ │ │ Core − Paid-up = reserves │ total equity │ ├──────────────┼────────────────────────────────┼─────────────────────┤ │ DAY 3 │ CCAR = Core ÷ RWE │ read CCAR, not CAR │ │ ratios │ CAR = TCF ÷ RWE │ a shrinking │ │ │ gap = Tier 2 ÷ RWE │ denominator │ │ │ │ flatters a ratio │ ├──────────────┼────────────────────────────────┼─────────────────────┤ │ DAY 4 │ CD = credit ÷ deposit ≤90 [R]│ solvency is not │ │ liquidity │ NetLiq = NLA ÷ deposits ≥20[R]│ liquidity; stress │ │ │ SLR ≥ 12 [R]│ is non-linear │ ├──────────────┼────────────────────────────────┼─────────────────────┤ │ DAY 5 │ NPL, Net NPL │ coverage is the │ │ quality │ coverage = (NPL−Net) ÷ NPL │ honesty measure; │ │ │ │ rankings invert │ ├──────────────┼────────────────────────────────┼─────────────────────┤ │ DAY 6 │ base = cost floor │ spread is margin, │ │ pricing │ spread ≈ lend − deposit rate │ not profit; a │ │ │ value = loan × bp ÷ 10,000 │ hard edge = a cap │ ├──────────────┼────────────────────────────────┼─────────────────────┤ │ DAY 7 │ prescribed / deprived / │ read ACROSS the │ │ mandate │ specified sector % │ row, not down the │ │ + screen │ │ column │ └──────────────┴────────────────────────────────┴─────────────────────┘
The one habit to keep
If you remember a single thing from this week, make it this:
┌──────────────────────────────────────────────────────────┐ │ │ │ EVERY RATIO IS A FRACTION. │ │ │ │ A fraction can improve because the numerator │ │ grew — or because the denominator died. │ │ │ │ Capital Merchant: CCAR 69.25%, NPL 100.00% │ │ │ │ Always read the level, not only the ratio. │ │ Always read the row, not only the cell. │ │ │ └──────────────────────────────────────────────────────────┘
The complete formula sheet
SOLVENCY Tier 2 = Total Capital Fund − Core Capital CCAR = Core Capital ÷ RWE × 100 CAR = Total Capital Fund ÷ RWE × 100 CAR − CCAR = Tier 2 ÷ RWE RWE (bank sheet) = Core Capital ÷ CCAR Accumulated result = Core Capital − Paid-up Capital LIQUIDITY CD Ratio = Total Credit ÷ Total Deposit × 100 ≤ 90 [R] Net Liquidity = Net Liquid Assets ÷ Deposits × 100 ≥ 20 [R] SLR = statutory reserve ÷ base × 100 ≥ 12 [R] Outflow stress = (NLA − out) ÷ (Deposits − out) ASSET QUALITY NPL % = NPL ÷ Total Loan × 100 Net NPL % = (NPL − Specific Provision) ÷ Total Loan × 100 Coverage % = (NPL % − Net NPL %) ÷ NPL % × 100 Bad loans (Rs) = Total Loan × NPL % Coverage top-up = Bad loans × (peer coverage − own coverage) PRICING Base rate = funds + statutory + operating + return [R] Spread ≈ lending rate − deposit rate [R] Gross margin ≈ Total Loan × Spread Value of n bp = Total Loan × n ÷ 10,000 MANDATE Prescribed sector % = directed lending ÷ total loan × 100 [R]
What you should be able to do now
- Name the six prescribed sectors and the two Class "C" categories.
- Explain the four ways a lending mandate feeds back into the other columns.
- Run the five-step screen on any institution in about ten minutes.
- Build a weighted resilience score, and articulate why your weights are a choice.
- Explain why a screen is a question generator rather than a verdict.
- State the five things this screen cannot tell you.
- Explain, using a real example, why every ratio must be read alongside the level of its denominator.
You have finished the week. Take the current KFI release from nrb.org.np, run the screen on all twenty banks, and compare your output with the one above. The numbers will have moved. The method will not have.
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