Dean's Office Official Model Question Paper

Answer: Financial System: A complex, interconnected network of financial institutions, markets, instruments, services, and regulatory bodies that mobilizes scarce financial resources from surplus economic units (savers) and channels them productively to deficit economic units (investors). Four Fundamental Components:

1. Financial Institutions (Intermediaries)
2. Financial Markets (Money & Capital Markets)
3. Financial Instruments (Assets/Securities)
4. Financial Regulators (e.g., Nepal Rastra Bank, SEBON)

Answer: Financial Intermediation: The process through which financial institutions (such as commercial banks) pool funds from numerous small individual depositors and allocate those funds as loans to corporate and household borrowers. Major Benefit: It provides denomination and risk diversification—allowing small savers to deposit modest sums safely while earning interest, without bearing the direct default risk of individual corporate borrowers.

Answer: Under Section 4 of the NRB Act, 2058, the primary objectives of NRB are:

1. To maintain price and balance of payments (BoP) stability to support sustainable economic growth.
2. To ensure the stability, trust, and soundness of the banking and financial sector.
3. To develop a secure, healthy, and efficient national payment system.

Answer: Cash Reserve Ratio (CRR): The mandatory minimum percentage of total domestic deposit liabilities that commercial banks and financial institutions (BFIs) must maintain as interest-free cash balances with the central bank (Nepal Rastra Bank). Significance: It serves as a direct quantitative monetary policy tool to regulate liquidity in the banking system and acts as a prudential safety reserve to meet unforeseen depositor runs.

Answer:

Answer: Money Market: The wholesale financial market for short-term debt instruments with original maturities of one year or less, providing liquidity management for institutions. Two Instruments in Nepal:

1. Treasury Bills (T-Bills): Short-term promissory notes issued by NRB on behalf of the Government of Nepal (28-day, 91-day, 182-day, 364-day).
2. Interbank Call Money: Short-term unsecured funds lent between commercial banks to manage temporary daily reserve imbalances.

Answer:

• Primary Market: The market where newly created securities (shares, debentures) are issued and sold to the public for the first time through Initial Public Offerings (IPOs) or Rights issues, directly channeling fresh capital to the issuing enterprise.
• Secondary Market: The market where existing, previously issued securities are traded among investors (e.g., Nepal Stock Exchange - NEPSE), providing liquidity to investors without raising fresh funds for the issuer.

Answer: Yield to Maturity (YTM): The total internal rate of return (IRR) anticipated on a bond if it is purchased at its current market price and held until its final maturity date, assuming all scheduled coupon payments are made punctually and reinvested at the identical yield rate.

Answer: Default Risk (Credit Risk): The uncertainty regarding an issuer’s financial ability or willingness to make timely payments of scheduled interest and principal on a debt obligation. In Nepal, credit rating agencies (ICRA Nepal, Care Ratings Nepal) evaluate this risk, assigning ratings ranging from AAA (highest safety / lowest default risk) down to D (default).

Answer: Established under the Securities Act, 2063, SEBON regulates, monitors, and supervises the securities markets and collective investment schemes (mutual funds) in Nepal to protect investors’ interests, ensure transparent disclosures, promote market fairness, and develop a robust national capital market.

1. Classification of NRB’s Monetary Policy Instruments

                     NRB Monetary Policy Instruments
                                    |
     +------------------------------+------------------------------+
     |                                                             |
Quantitative / General Tools                              Qualitative / Selective Tools
  - Cash Reserve Ratio (CRR)                                - Credit-to-Deposit (CD) Ratio Cap
  - Statutory Liquidity Ratio (SLR)                         - Priority Sector Lending Targets
  - Policy Rate / Bank Rate / Repo Rate                     - Margin Lending Caps
  - Open Market Operations (OMO / SLF)                      - Moral Suasion & Directives

A. Quantitative (General) Instruments

1. Cash Reserve Ratio (CRR): Mandatory interest-free reserve kept at NRB (currently 4% for commercial banks). Raising CRR contracts banking loanable funds; lowering CRR injects liquidity.
2. Statutory Liquidity Ratio (SLR): Mandatory percentage of deposits maintained in liquid assets (cash, gold, unencumbered government bonds - currently 12% for Class ‘A’ banks).
3. Interest Rate Corridor (IRC):
   • Ceiling: Standing Liquidity Facility (SLF) rate / Bank Rate.
   • Policy Rate: Repo rate for injecting liquidity.
   • Floor: Standing Deposit Facility (SDF) rate for absorbing excess funds.
4. Open Market Operations (OMO): Outright purchase/sale of government securities, Reverse Repo auctions, and deposit collection instruments.

B. Qualitative (Selective) Instruments

1. Credit-to-Deposit (CD) Ratio: Mandated at a maximum ceiling of 90% to prevent over-leveraged credit expansion.
2. Directed Sectoral Lending: Directives requiring minimum percentage allocations (e.g., 15% in Agriculture, 10% in Energy/Hydropower, 15% in MSMEs).
3. Margin Lending Restrictions: Prescribing loan-to-value (LTV) limits and single-obligor ceilings on share-backed loans.

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2. Monetary Transmission Mechanism

The process through which central bank monetary policy adjustments affect real economic variables (output, employment, inflation):

$$\text{NRB Policy Actions} \implies \text{Interbank \& Base Rates} \implies \text{Bank Lending Rates} \implies \text{Investment \& Consumption} \implies \text{Inflation \& GDP}$$

1. Interest Rate Channel: When NRB hikes the policy rate, interbank borrowing costs rise. Commercial banks raise their Base Rates, elevating retail and corporate lending rates, which dampens aggregate demand and cools inflation.
2. Credit Channel: High reserve requirements restrict loanable funds, causing banks to tighten credit rationing, slowing down real estate speculation and import demand.

1. Comparative Analysis: Money Market vs. Capital Market

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2. Modern Structural Reforms in NEPSE

Over the past decade, the Nepalese capital market has evolved from manual, paper-based trading into a fully computerized electronic marketplace:

1. NEPSE Automated Trading System (NOTS): Transitioned trading from physical open-outcry on the trading floor to a fully automated electronic matching engine accessible nationwide.
2. Establishment of CDS and Clearing Ltd. (CDSC): Dematerialized physical share certificates into electronic book entries (Demat Accounts), ending forged certificates, transit delays, and transfer bottlenecks.
3. Centralized Application Supported by Blocked Amount (C-ASBA): Revolutionized primary market IPO applications through the MeroShare digital portal, locking application funds in the applicant’s own bank account until allotment, eliminating manual paper cheques and long refund queues.
4. Trade Management System (TMS): Empowered retail investors to place online buy and sell orders directly from their personal computers or mobile phones.
5. Introduction of Book Building System: Reformed IPO pricing, permitting profitable real-sector corporate entities (e.g., Sarbottam Cement) to discover fair offering prices above par value (Rs. 100) based on institutional price bids.

1. Conceptual Foundation of Loanable Funds Theory

The Loanable Funds Theory posits that the equilibrium market interest rate is determined by the intersection of the aggregate demand for loanable funds and the aggregate supply of loanable funds in the financial system over a given period.

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2. Sources of Supply of Loanable Funds ($S_L$)

The total volume of loanable funds supplied increases as the market interest rate rises (positive slope):

1. Household and Business Savings ($S$): Higher interest rates reward thrift, encouraging deferred consumption.
2. Dishoarding ($\Delta H$): Mobilizing past idle cash balances into interest-earning bank deposits.
3. Credit Creation by Commercial Banks ($\Delta M$): Commercial banks expand loan creation when interest rate spreads are lucrative.
4. Disinvestment ($DI$): Allowing depreciating capital assets to liquidate into cash without replacement.

$$S_L = S + \Delta H + \Delta M + DI$$

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3. Sources of Demand for Loanable Funds ($D_L$)

The demand for loanable funds varies inversely with the interest rate (negative slope):

1. Business Investment Demand ($I$): Capital investments in factories, machinery, and inventory are viable only if expected return on capital exceeds borrowing cost.
2. Consumer Borrowing ($C$): Household loans for consumer durables, automobiles, and housing mortgages.
3. Government Deficit Borrowing ($G$): State borrowing to finance fiscal infrastructure deficits via Treasury bills and development bonds.
4. Hoarding ($H$): Holding liquid idle money for speculative purposes.

$$D_L = I + C + G + H$$

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4. Equilibrium Interest Rate Determination

    Interest Rate (r)
            |          Supply of Loanable Funds (SL)
            |           /
            |          /
       re   |-------- *  (Equilibrium Point E)
            |        / \
            |       /   \
            |      /     \
            |     /       \  Demand for Loanable Funds (DL)
            +--------------------------- Quantity of Funds (Q)
                     Qe

• At the equilibrium rate $r_e$, $S_L = D_L$.
• If market interest rates exceed $r_e$, excess supply of funds creates downward pressure on rates.
• If market rates fall below $r_e$, excess demand from borrowers drives interest rates upward until equilibrium is restored.

1. Definition and Shapes of Yield Curves

The Yield Curve is a graphical plot illustrating the relationship between yields to maturity (interest rates) and term to maturity for fixed-income securities of identical default risk (typically benchmark government bonds).

   Normal Yield Curve (Upward)         Inverted Yield Curve (Downward)
         Yield                                Yield
           |      /                             |  \
           |     /                              |   \
           +------------ Maturity               +------------ Maturity

• Normal (Upward Sloping): Long-term rates exceed short-term rates.
• Inverted (Downward Sloping): Short-term rates exceed long-term rates (frequently a harbinger of economic recession).
• Flat: Identical yields across short and long maturities.

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2. Theories of Term Structure

A. Pure Expectations Theory (Unbiased Expectations)

• Core Proposition: The forward interest rates embedded in the yield curve represent unbiased forecasts of future short-term spot interest rates.
• Mathematical Principle: An investor will earn the same total return whether investing in a two-year bond today or investing in a one-year bond and rolling it over into another one-year bond next year:
  $$(1 + _{0}R_{2})^2 = (1 + _{0}R_{1})(1 + E[_{1}R_{1}])$$
• Implication: An upward-sloping yield curve indicates financial markets expect short-term rates to rise in the future; an inverted curve signals an expectation that interest rates and inflation will fall.
• Limitation: Assumes investors are risk-neutral and treat different maturities as perfect substitutes, ignoring interest rate price risk.

B. Liquidity Premium Theory

• Core Proposition: Formulated by John R. Hicks, this theory asserts that investors prefer short-term securities due to superior liquidity and lower price sensitivity to interest rate fluctuations.
• Lenders’ Perspective: To entice risk-averse investors to lock funds into long-term bonds, issuers must offer a positive Liquidity Premium ($L_t$) that increases with maturity.
• Borrowers’ Perspective: Borrowers prefer long-term financing to lock in funding costs and avoid rollover risk, making them willing to pay this premium.
• Formulation:
  $$(1 + _{0}R_{n})^n = \prod_{t=1}^{n} (1 + E[_{t-1}R_{t}] + L_t)$$
• Analytical Takeaway: The Liquidity Premium Theory explains why yield curves are naturally upward-sloping during normal economic conditions, even when future interest rates are expected to remain flat.

1. Concept of Contractual Savings Institutions

Contractual savings institutions mobilize long-term contractual savings from formal sector workers and public servants through regular, mandatory or voluntary payroll deductions, creating deep pools of patient long-term domestic capital.

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2. Role of Key Institutions in Nepal

                 Contractual Savings Giants in Nepal
                                  |
         +------------------------+------------------------+
         |                                                 |
Employees Provident Fund (EPF)                  Citizen Investment Trust (CIT)
- Mandatory social security for civil          - Voluntary retirement plans, gratuity funds,
  servants, army, police, teachers.              investor accounts, capital market underwriting.

A. Employees Provident Fund (EPF - Karmachari Sanchaya Kosh)

1. Mandatory Long-Term Savings: Administers retirement provident funds for civil servants, military personnel, schoolteachers, and registered private enterprise employees.
2. Financing Strategic National Mega-Projects: Direct financier of national infrastructure assets. Notably, EPF was the lead financier of the landmark Upper Tamakoshi Hydropower Project (456 MW), proving that domestic savings could finance mega-energy assets without foreign debt.
3. Social Security Benefits: Offers collateral-free medical health insurance coverage, maternity benefits, and emergency relief to contributors.

B. Citizen Investment Trust (CIT - Nagarik Lagani Kosh)

1. Broadening Retirement Protection: Operates Employee Savings Schemes, Gratuity Schemes, and Pension Funds for both formal and informal sector employees.
2. Capital Market Development: Operates as a designated institutional investor, mutual fund custodian, issue manager, and underwriter for corporate IPOs and debentures, helping stabilize market volatility.
3. Corporate Loan Facilities: Extends bridge loans and syndicated project loans for aircraft procurement (Nepal Airlines) and real estate housing schemes.

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3. Contribution to National Economic Growth

• Anti-Inflationary Mobilization: Channels consumer purchasing power into long-term infrastructure investment.
• Deepening Domestic Debt Market: Primary institutional buyers of Government Development Bonds and corporate debentures.
• Mitigating External Debt Dependency: Reduces Nepal’s vulnerability to foreign sovereign debt traps by mobilizing indigenous domestic financial savings.

1. Need for Capital Adequacy Framework

Following the 2008 Global Financial Crisis, the Basel Committee on Banking Supervision (BCBS) formulated BASEL III to strengthen bank capital requirements, introduce liquidity buffers, and limit financial leverage. Nepal Rastra Bank implemented the BASEL III framework for Class ‘A’ Commercial Banks to ensure domestic banks can absorb unforeseen credit, market, and operational losses.

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2. Classification of Bank Regulatory Capital

                        Total Regulatory Capital
                                   |
         +-------------------------+-------------------------+
         |                                                   |
Tier 1: Core Capital                               Tier 2: Supplementary Capital
- Common Equity Tier 1 (CET1)                      - General Loan Loss Provision (Pass loans)
- Additional Tier 1 (AT1)                          - Subordinated Term Debt (Bonds)
- High loss-absorption on going-concern basis      - Exchange Equalization Reserve
                                                   - Gone-concern loss absorption

A. Tier 1: Core Capital (Going-Concern Capital)

Absorbs losses while the bank remains solvent and operating:

1. Common Equity Tier 1 (CET1):
   • Fully paid-up equity share capital.
   • Proposed bonus shares.
   • Statutory General Reserve.
   • Retained earnings and capital reserves.
   • Less: Regulatory deductions (goodwill, investment in subsidiaries exceeding limits, deferred tax assets).
2. Additional Tier 1 (AT1): Perpetual non-cumulative preference shares, perpetual debt instruments without maturity dates.

B. Tier 2: Supplementary Capital (Gone-Concern Capital)

Provides protection to depositors in the event of involuntary liquidation:

1. General Loan Loss Provision: Up to a maximum of 1.25% of total credit-risk-weighted exposures (on pass and watchlist loans).
2. Subordinated Term Debt: Qualifying debentures with a minimum original maturity of 5 years (subject to annual 20% amortization discount during last 5 years).
3. Exchange Equalization Reserve: Statutory currency revaluation reserves.

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3. Regulatory Capital Benchmarks in Nepal (NRB Unified Directives)

$$\text{Capital Adequacy Ratio (CAR)} = \frac{\text{Total Regulatory Capital (Tier 1 + Tier 2)}}{\text{Total Risk Weighted Exposures (Credit + Market + Operational)}} \times 100\%$$

• Minimum CET1 Ratio: At least 4.5%
• Minimum Tier 1 Capital Ratio: At least 6.0%
• Capital Conservation Buffer (CCB): 2.5% (in common equity)
• Total Minimum Capital Adequacy Ratio (CAR): 11.0% (8.5% minimum total capital + 2.5% CCB). Banks falling below these thresholds face Prompt Corrective Action (PCA) and dividend freezes.

1. Macro-Financial Overview of Nepalese Banking Architecture

Over the past decade, Nepal experienced aggressive financial deepening, with private sector domestic credit-to-GDP expanding above 90%, ranking among the highest among developing South Asian nations. However, this credit expansion was heavily tilted toward real estate speculation, consumption financing, and import trading rather than productive industrial manufacturing or export infrastructure.

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2. Diagnostic Analysis of Systemic Vulnerabilities

                  Anatomy of Systemic Banking Pressures
                                    |
    +-------------------+-----------+-----------+-------------------+
    |                   |                       |                   |
Surge in Gross      Cooperative Sector      Lethargic Real       Regulatory Overhaul
NPLs & Provisioning     Contagion           Estate & Trading      & Working Capital

1. Surge in Non-Performing Loans (NPLs)

• Asset Quality Deterioration: Commercial bank gross NPLs surged from historic lows of ~1.2% up toward 4.0% – 5.0%, with several development banks crossing 7%.
• Working Capital Guidelines: The enforcement of NRB’s stringent Working Capital Loan Guidelines, 2079 halted the systemic practice of "Evergreening" (taking fresh loans to settle past interest due). Borrowers were forced to align credit with actual revenue cycles, exposing previously hidden defaults.
• Economic Slowdown: Sluggish government capital expenditure, high post-pandemic inflation, and tight liquidity compressed retail consumer spending, hurting trading enterprises.

2. Distress and Crisis in Savings and Credit Cooperatives (Sahakari)

• Lack of Prudential Supervision: Cooperatives operated under lax oversight from the Department of Cooperatives without central bank prudential controls or reserve requirements.
• Insider Misappropriation: Unscrupulous promoters siphoned billions in retail public deposits into illiquid speculative real estate ventures and promoter-owned private companies.
• Contagion Spillover: Collapse of prominent urban cooperatives triggered widespread depositor panic, drying up neighborhood retail liquidity and reducing SME cash flows into formal commercial banks.

3. Real Estate and Asset Market Stagnation

• Bank balance sheets are over-collateralized by land and buildings (over 65% of loans in Nepal are secured by real estate).
• When property transaction turnover plummeted due to land plotting restrictions and tighter LTV limits, banks found it impossible to auction seized collateral, locking up valuable bank capital in non-banking assets (NBA).

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3. Strategic Policy Measures to Restore Financial Resilience

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4. Conclusion

The resilience of Nepal’s financial sector hinges on resolving bad loans transparently, reforming rogue cooperatives, and reorienting credit toward export-led productive sectors. By insulating regulatory supervision from political interference and modernizing resolution frameworks, Nepal can safeguard depositors’ savings and foster durable macroeconomic stability.

Solution: Quantitative Valuation Analysis

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Part (a): Bond Valuation and Price Sensitivity Analysis

1. Intrinsic Market Value at YTM = 8%

• Face Value ($M$): Rs. 1,000
• Annual Coupon Payment ($I$): $\text{Rs. } 1,000 \times 10\% = \text{Rs. } 100$
• Maturity ($n$): 5 years
• Required Yield ($k_d$): 8% ($0.08$)

$$\text{Bond Value } (V_0) = I \times \text{PVIFA}_{k_d, n} + M \times \text{PVIF}_{k_d, n}$$

$$\text{PVIFA}_{8\%, 5} = \frac{1 - (1 + 0.08)^{-5}}{0.08} = \frac{1 - 0.68058}{0.08} = 3.9927$$

$$\text{PVIF}_{8\%, 5} = (1 + 0.08)^{-5} = 0.68058$$

$$V_0 = 100 \times 3.9927 + 1,000 \times 0.68058 = 399.27 + 680.58 = \mathbf{\text{Rs. } 1,079.85}$$

The bond trades at a premium (Rs. 1,079.85 > Rs. 1,000) because its coupon rate (10%) exceeds the market yield (8%).

2. New Bond Price at YTM = 11% and Inverse Relationship

• New Required Yield ($k_d'$): 11% ($0.11$)
  $$\text{PVIFA}_{11\%, 5} = \frac{1 - (1 + 0.11)^{-5}}{0.11} = \frac{1 - 0.59345}{0.11} = 3.6959$$
  $$\text{PVIF}_{11\%, 5} = (1 + 0.11)^{-5} = 0.59345$$
  $$V_0' = 100 \times 3.6959 + 1,000 \times 0.59345 = 369.59 + 593.45 = \mathbf{\text{Rs. } 963.04}$$
  The bond now trades at a discount (Rs. 963.04 < Rs. 1,000).

Explanation of Inverse Relationship: Bond prices and interest rates move in opposite directions because a bond’s contractual coupon cash flows are fixed. When market interest rates rise to 11%, newly issued bonds offer higher returns, rendering the existing 10% bond unattractive. To induce investors to purchase it, the price of the existing bond must fall until its expected yield matches the prevailing market rate.

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Part (b): Equity Valuation and CAPM Decision

1. Required Rate of Return using CAPM

• Risk-free rate ($R_f$) = $5\%$
• Expected market return ($R_m$) = $13\%$
• Systematic risk beta ($\beta$) = $1.25$$\text{Required Return } (k_e) = R_f + \beta (R_m - R_f)$$
  $$k_e = 5\% + 1.25 \times (13\% - 5\%) = 5\% + 1.25 \times 8\% = 5\% + 10\% = \mathbf{15\% \text{ (or } 0.15)}$$

2. Intrinsic Value using Constant Growth Model (Gordon Model)

• Current dividend ($D_0$) = Rs. 20
• Constant dividend growth rate ($g$) = $6\%$ ($0.06$)
• Expected dividend next year ($D_1$):
  $$D_1 = D_0 (1 + g) = 20 \times (1 + 0.06) = \text{Rs. } 21.20$$
• Intrinsic Stock Value ($P_0$):
  $$P_0 = \frac{D_1}{k_e - g} = \frac{21.20}{0.15 - 0.06} = \frac{21.20}{0.09} = \mathbf{\text{Rs. } 235.56}$$

3. Investment Recommendation

• Current Market Price ($P_m$): Rs. 350.00
• Calculated Intrinsic Value ($P_0$): Rs. 235.56
• Decision: The stock is significantly OVERVALUED in the market ($P_m > P_0$). Advice to Investor: An investor holding the stock should SELL to take profits; prospective buyers should avoid buying until the market price corrects downward toward its intrinsic value.

Case Solution: Lumbini Apex Bank (LAB)

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Part (a): Diagnostic Analysis of Financial Risks (6 Marks)

                       The Triangle of Vulnerabilities at LAB
                                        |
     +----------------------------------+----------------------------------+
     |                                  |                                  |
Asset-Liability Mismatch             Liquidity & Run Risk              Interest Rate Risk
Short-term liabilities funding      High concentration in volatile    Surging liability costs while
long-term illiquid loans            institutional wholesale deposits  long-term loans have sticky yields

1. Asset-Liability Maturity Mismatch: LAB committed the classic banking error of "Borrowing Short and Lending Long" (Maturity Mismatch). LAB financed 15-year illiquid hydropower projects and long-term real estate assets using 6-month to 1-year institutional deposits. When short-term deposits mature, the bank cannot liquidate 15-year hydropower assets to repay depositors.

2. Severe Liquidity and Concentration Risk: Wholesale institutional deposits (CIT, EPF, insurance companies) account for 52% of total liabilities, far exceeding healthy prudential thresholds. Wholesale funds are notorious for being hot money—extremely sensitive to interest rate differentials and capable of triggering an instantaneous liquidity crisis if sudden bulk withdrawals occur.

3. Interest Rate Risk & Net Interest Margin (NIM) Compression: Surging deposit rates immediately inflate LAB’s cost of funds. However, lending rates cannot be repriced upward instantaneously without triggering corporate defaults. Consequently, the bank’s Net Interest Margin compresses sharply.

4. Regulatory Non-Compliance Risk: With a CD ratio of 94.2% (against NRB’s mandatory ceiling of 90%), LAB faces punitive regulatory measures: financial penalties, suspension of dividend payouts, restrictions on branch opening, and humiliating reputational damage.

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Part (b): Integrated Asset-Liability Management (ALM) Action Plan (9 Marks)

1. Immediate Measures to Correct CD Ratio Below 90% (Within 45 Days)

$$\text{Current CD Ratio} = \frac{\text{Total Loans}}{\text{Total Deposits}} = \frac{\text{Rs. } 132 \text{ Billion}}{\text{Rs. } 140 \text{ Billion}} = 94.28\%$$

To achieve a CD ratio of $90\%$ at the current loan base of Rs. 132 Billion:

$$\text{Required Deposits} = \frac{\text{Rs. } 132 \text{ Billion}}{0.90} = \mathbf{\text{Rs. } 146.67 \text{ Billion}}$$

Target: LAB must mobilize Rs. 6.67 Billion in fresh deposits or curtail loan exposures accordingly.

Immediate Tactical Actions:

• Loan Securitization / Loan Sell-Down: Sell down portions of long-term syndicated hydropower loans (Rs. 4 to 6 Billion) to better-capitalized peer commercial banks that have surplus lending capacity.
• Deposit Retention Pact: Negotiate with institutional depositors to roll over maturing funds for at least 12 to 24 months, offering competitive market rates while avoiding mass flight of deposits.
• Moratorium on Fresh Disbursements: Freeze all new non-committed loan originations and halt overdraft limit increases until the CD ratio retreats safely below 88%.

2. Structural Liabilities Restructuring (Months 2 to 6)

• Aggressive CASA Drive: Shift focus from volatile wholesale institutional deposits to sticky, low-cost retail Current and Savings Accounts (CASA). Deploy retail marketing campaigns, salary account tie-ups with corporate firms, and digital onboarding to attract retail deposits across rural and semi-urban branches.
• Issuance of Long-Term Subordinated Debentures: Float Rs. 3 to 5 Billion in 7-to-10-year corporate debentures. Under NRB rules, qualifying long-term bonds can be factored into capital/funding calculations, dampening the CD ratio pressure.

3. Strengthening Institutional ALCO Governance (Long-Term Resilience)

• Weekly ALCO Meetings: The Asset-Liability Committee (ALCO) must meet weekly to inspect cumulative maturity mismatch gap reports across time buckets (1–30 days, 31–90 days, 1–5 years).
• Adoption of Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR): Maintain high-quality liquid assets (HQLA) exceeding 100% of potential 30-day net cash outflows to survive unexpected wholesale deposit withdrawals.
• Loan Portfolio Rebalancing: Cap long-term illiquid project finance at no more than 25% of total bank assets, channeling the remaining loan portfolio into revolving short-term trade finance, bills discounting, and commercial SME lending with faster cash turnover cycles.