Dean's Office Official Model Question Paper

Cash Reserve Ratio (CRR)

CRR is the mandatory minimum percentage of total domestic deposit liabilities that commercial banks must maintain as unencumbered cash balances with Nepal Rastra Bank. The current statutory benchmark for Class ‘A’ commercial banks is 4.0%.

Credit-to-Deposit (CD) Ratio

$$\text{CD Ratio} = \frac{\text{Total Domestic Loans and Advances}}{\text{Total Deposits} + \text{Borrowings / Capital Funds}} \times 100$$

Nepal Rastra Bank enforces a mandatory regulatory ceiling of 90.0% to prevent excessive bank credit expansion.

Revocable vs. Irrevocable LC

• Revocable LC: Can be amended or canceled by the issuing bank at any time without prior notice to or consent from the beneficiary (now obsolete under UCP 600).
• Irrevocable LC (Global Standard): Constitutes a definite undertaking that cannot be amended, modified, or canceled without the express consent of the issuing bank, confirming bank, and beneficiary.

Statutory Liquidity Ratio (SLR)

SLR is the statutory percentage of total deposit liabilities that commercial banks must maintain in specified liquid assets (cash, gold, and government treasury bills/bonds). For Class ‘A’ commercial banks, it is 12.0%.

Real-Time Gross Settlement (RTGS)

RTGS is a continuous electronic payment settlement system operated by the central bank where large-value and urgent interbank fund transfers are processed and settled individually on a gross, real-time basis with immediate finality.

Operational Workflow of Import Letter of Credit (UCP 600)

[1. Importer (Buyer)] <=== Commercial Contract ===> [2. Exporter (Seller)]
        |
        v (Applies for LC)
[3. Issuing Bank (Nepal)] ----(Transmits MT700 LC)----> [4. Advising / Confirming Bank]
        |                                                    |
        v (Payment Remitted)                                 v (Ships Goods & Presents Docs)
[Releases Docs to Importer] <--- Complying Docs Forwarded --- [Examines Docs]

Operational Stages under UCP 600:

1. Application & Credit Assessment: The importer applies to the issuing bank; the bank assesses credit limits, margins, and collateral before issuing the SWIFT MT700 message.
2. Advising & Confirmation: The foreign advising bank verifies LC authenticity and notifies the exporter.
3. Shipment & Document Presentation: The exporter ships the goods and presents clean shipping documents (Bill of Lading, Commercial Invoice, Packing List, Insurance Certificate) within the presentation window.
4. Document Examination (Strict Compliance): Under Article 14 of UCP 600, banks examine documents solely on their face within 5 banking days.
5. Settlement and Cargo Clearance: Upon honoring the conforming presentation, the issuing bank releases the original Bill of Lading to the importer for customs port clearance.

Corporate Credit Appraisal and Working Capital Assessment

1. Credit Appraisal Dimensions (The 5 Cs of Credit)

• Character: Integrity, track record, and CIB credit history of promoters.
• Capacity: Cash flow generation capability (Debt Service Coverage Ratio - DSCR).
• Capital: Promoter net worth and equity contribution.
• Collateral: Value, enforceability, and liquidity of pledged securities.
• Conditions: Industry macro trends and competitive dynamics.

2. Working Capital Assessment (Turnover Method)

• Assumes minimum operational working capital requirement is 25% of projected annual turnover.
• Financing Split:
  • Minimum promoter contribution (margin money) = 5% of turnover.
  • Maximum Permissible Bank Finance (MPBF) = 20% of turnover.
• For larger corporate entities, banks utilize the Operating Cycle method, analyzing Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO), and Days Payable Outstanding (DPO).

Digital Payment Infrastructure: NCHL Payment Systems

NCHL modernizes national payment clearing under the regulatory supervision of Nepal Rastra Bank.

1. Electronic Cheque Clearing (NCHL-ECC)

• Digitizes traditional paper checks via high-speed optical magnetic scanners (MICR/OCR).
• Digital image and transaction data are transmitted electronically, settling check funds within the same banking day without physical paper transport.

2. Interbank Payment System (NCHL-IPS)

• Batch-clearing system for scheduled electronic credit/debit transfers (salary payments, vendor bulk settlements, dividend warrants).

3. ConnectIPS (Real-Time Retail Platform)

• 24/7 real-time, bank-account-to-bank-account digital fund transfer platform allowing consumers and businesses to initiate instant transfers via mobile apps, web portals, and merchant checkout gateways using two-factor authentication.

CAMELS Framework in Bank Supervision

CAMELS is an international supervisory rating system evaluating six components:

1. C - Capital Adequacy: Tier 1 and Tier 2 capital ratios relative to risk-weighted assets.
2. A - Asset Quality: Non-performing loan (NPL) ratios, portfolio sector concentration, and provisioning adequacy.
3. M - Management Soundness: Quality of board oversight, risk governance policies, and internal audit compliance.
4. E - Earnings Performance: Return on Assets (ROA), Return on Equity (ROE), Net Interest Margin (NIM), and earnings quality.
5. L - Liquidity Position: Compliance with CRR, SLR, CD ratio, and asset-liability maturity mismatches.
6. S - Sensitivity to Market Risk: Vulnerability to adverse shifts in interest rates, foreign exchange fluctuations, and equity prices.

Case Analysis: Operational and Regulatory Recovery at Global Alpine Bank

a. Regulatory Sanctions under NRB Act & Directives

1. CRR Deficit Penalties: Falling below the 4.0% CRR threshold on reporting Fridays triggers statutory monetary penalties calculated at bank rate interest applied to the shortfall amount under Section 99 of the NRB Act.
2. CD Ratio Sanctions: Breaching the 90% CD ceiling results in formal cautionary directives, bans on expanding new branch networks, and restrictions on dividend declarations until ratios normalize.

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b. Asset-Liability Management (ALM) Liquidity Rebalancing Strategy

[Current Position: Deposits = 140B, Loans = 128B, CD = 91.43%]
- Maximum allowable loans at 90% CD = 140B * 0.90 = 126B (Rs 2 Billion Excess Credit)
         |
         +---------------------------------------+
         |                                       |
         v                                       v
[Strategy 1: Deposit Mobilization]          [Strategy 2: Loan Portfolio Pruning]
- Mobilize Rs 5B in institutional fixed      - Liquidate Rs 2B short-term interbank
  deposits by offering competitive rates.     call loans and freeze new credit lines.
- Target New Deposits = 145B.               - Reduce net credit to 126B.
         |                                       |
         +-------------------+-------------------+
                             |
                             v
        [RESULT: Revised CD = 126B / 145B = 86.9% (Compliant!)]
        [Replenish CRR to 4.2% using fresh institutional deposit cash]

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c. Standard Operating Procedure (SOP) for Credit Origination and Risk Control

1. Mandatory Centralized CIB Clearance: No branch manager can disburse loans without an automated electronic Credit Information Bureau clearance verifying zero default history across all family affiliates.
2. Dual-Officer Independent Godown Inspection: Working capital inventory must be physically inspected and verified quarterly by two independent bank officers, with geo-tagged photos uploaded to the core banking system.
3. Centralized Credit Underwriting: Decentralized branch approval limits capped at Rs 5 million; all exposures exceeding Rs 5M must be appraised by the centralized risk department at Head Office.

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d. NPA Resolution and Recovery Strategy

1. Specialized Stressed Asset Resolution Unit (SARU): Transfer all accounts overdue past 60 days to a dedicated recovery cell led by legal experts.
2. One-Time Settlement (OTS) Negotiations: Offer structured loan restructuring where borrowers make an immediate 25% cash down payment in exchange for interest penalty waivers.
3. Aggressive Foreclosure via Public Auction: Issue statutory 35-day public auction notices for non-compliant borrowers, seizing mortgaged real estate and initiating debt recovery tribunal (DRT) litigation.