Dean's Office Official Model Question Paper

Primary Objectives of the NRB Act, 2058 (2002)

Under Section 4 of the NRB Act, 2058, the central bank aims to:

1. Maintain price, macroeconomic, and balance-of-payments stability to support sustainable economic growth.
2. Enhance financial sector stability, foster public trust in the banking system, and develop secure and efficient payment and settlement systems.

Classification of Financial Institutions under BAFIA, 2073

Section 37 of the Bank and Financial Institutions Act (BAFIA), 2073 classifies institutions into four categories based on minimum paid-up capital and operational scope:

• Class ‘A’: Commercial Banks (Rs. 8 Billion minimum capital).
• Class ‘B’: Development Banks (Rs. 2.5 Billion national-level).
• Class ‘C’: Finance Companies (Rs. 800 Million national-level).
• Class ‘D’: Microfinance Financial Institutions.

Non-Performing Loans (NPL) under NRB Directives

An NPL is a loan where principal or interest payments remain overdue for more than 90 days. NRB Directives classify NPLs into three categories:

1. Substandard: Overdue for 90 days up to 180 days (25% provisioning).
2. Doubtful: Overdue for 180 days up to 360 days (50% provisioning).
3. Loss: Overdue for more than 360 days, or borrower declared bankrupt/absconding (100% provisioning).

Single Borrower Limit (SBL)

The Single Borrower Limit is a prudential cap designed to prevent loan concentration risk. NRB Unified Directives mandate that total credit exposure to a single client or related group cannot exceed:

• Fund-based Credit: Maximum 25% of the bank’s Core (Tier 1) Capital.
• Non-fund based Credit: Maximum 50% of the bank’s Core (Tier 1) Capital.

CRR vs. SLR

Basel III Capital Adequacy Framework under NRB Directives

NRB mandates the Basel III Capital Accord to ensure commercial banks maintain robust solvency buffers:

1. Common Equity Tier 1 (CET1) Capital: Highest quality loss-absorbing capital (paid-up common shares, statutory reserves, retained earnings); minimum 4.5% of Risk-Weighted Assets (RWA).
2. Tier 1 Capital: Includes CET1 plus eligible non-cumulative perpetual preferred instruments; minimum 6.0% of RWA.
3. Total Capital (Tier 1 + Tier 2): Minimum 8.5% regulatory capital plus supplemental reserves.
4. Capital Conservation Buffer (CCB): Mandatory 2.5% CET1 buffer, raising the total minimum capital requirement to 11.0% of total RWA.
5. Countercyclical Buffer (CCyB): Dynamic buffer ranging from 0% to 2.5% activated during periods of excessive macroeconomic credit expansion.

AML/CFT and KYC Statutory Framework in Nepal

Governed by the Money Laundering Prevention Act, 2064 (2008) and NRB Directive 19:

1. Customer Due Diligence (CDD): Mandatory verification of customer identity, legal form, beneficial ownership, and source of funds prior to account establishment.
2. Enhanced Due Diligence (EDD): Applied to Politically Exposed Persons (PEPs), non-resident clients, and high-risk business sectors.
3. Threshold Transaction Reporting (TTR): Mandatory reporting of any single cash transaction or series of connected transactions exceeding Rs. 1,000,000 to the Financial Information Unit (FIU-Nepal).
4. Suspicious Transaction Reporting (STR): Reporting any transaction, irrespective of amount, that exhibits unusual complexity, economic irrationality, or potential link to illegal activities within 3 business days.

NRB Powers regarding PCA and Troubled Bank Resolution

Under Chapter 10 of the NRB Act, 2058 and BAFIA, 2073:

1. Triggers for PCA: Initiated when a bank’s capital adequacy ratio (CAR) falls below statutory thresholds or when critical operational deficiencies persist.
2. Mandatory Corrective Directives: Capping dividend payments, restricting executive remuneration, barring branch expansion, and halting high-risk asset origination.
3. Assumption of Management: NRB can suspend the Board of Directors and appoint a central bank management team to run operations.
4. Restructuring and Liquidation: Power to order mandatory merger, capital write-downs, asset transfers, or file for judicial liquidation before the High Court.

Case Analysis: XYZ Commercial Bank Capital Adequacy and Regulatory Assessment

1. Capital Base Computation:

• Gross Tier 1 Capital: Paid-up Capital (Rs. 8.0B) + Statutory Reserves (Rs. 2.5B) = Rs. 10.5 Billion.
• Provisioning Shortfall Adjustment: Unprovided NPL shortfall must be deducted directly from Tier 1 Capital: $\text{Adjusted Tier 1} = 10.5 - 1.8 = \mathbf{Rs.\ 8.7\ Billion}$.
• Tier 2 Capital: Subordinated debt eligible up to 50% of Tier 1 = Rs. 1.5 Billion.
• Total Adjusted Capital Base: $8.7 + 1.5 = \mathbf{Rs.\ 10.2\ Billion}$.

2. Capital Adequacy Ratios (RWA = Rs. 95 Billion):

$$\text{Adjusted Tier 1 Ratio} = \frac{8.7}{95} \times 100\% = \mathbf{9.16\%}$$

$$\text{Total Capital Adequacy Ratio (CAR)} = \frac{10.2}{95} \times 100\% = \mathbf{10.74\%}$$

3. Regulatory Compliance Assessment:

• Tier 1 Requirement: Minimum 6.0% required; Bank achieves 9.16% (Compliant).
• Total CAR Requirement: Minimum 11.0% (8.5% total + 2.5% CCB) required; Bank achieves 10.74% (Breach of 0.26%).

4. NRB Supervisory Measures:

1. Restriction on Profit Distribution: Prohibition of bonus and cash dividend declarations until the Capital Conservation Buffer is restored to 11.0%.
2. Capital Augmentation Plan: Mandate the bank submit a time-bound capital restoration plan within 30 days (e.g., rights issue or issuance of additional Tier 2 debentures).
3. Risk Asset Caps: Prohibit growth in risk-weighted assets and freeze new credit allocations until NPL recoveries bridge the provisioning deficit.