Commercial Bank Management

Primary Function: Accepting deposits from the public (savings, current, fixed) and granting loans and advances (working capital, term loans) to individuals and business enterprises for productive economic activities.

Concept: The strategic management of a commercial bank’s balance sheet to manage interest rate risk, liquidity risk, and foreign exchange risk, while maximizing net interest income (NII) within regulatory limits.

If $\text{RSA} > \text{RSL}$, the gap is positive (asset-sensitive); if $\text{RSA} < \text{RSL}$, the gap is negative (liability-sensitive).

It measures how efficiently a bank invests its funds relative to interest costs.

Differences:

1. Form: CRR is maintained purely in cash balances with Nepal Rastra Bank; SLR is maintained in cash plus approved liquid assets (government securities).
2. Return: CRR earns zero interest; SLR securities (treasury bills, development bonds) yield interest income.

The 5 Cs of Credit:

1. Character: Integrity and repayment willingness of borrower.
2. Capacity: Cash flow ability to service debt.
3. Capital: Net worth and equity stake.
4. Collateral: Pledged security in case of default.
5. Conditions: Economic and industry environment.

Concept: A non-cash expense set aside by a bank on its income statement to absorb anticipated credit defaults and losses in its loan portfolio per NRB Directives.

Concept: A financial derivative contract that allows a bank to transfer its loan credit risk to a third-party protection seller in exchange for periodic premium payments.

Concept: The statutory reference interest rate computed by commercial banks per NRB formula (Cost of funds + CRR/SLR cost + Operating costs + 0.75% return on assets) below which banks cannot lend (except consortium/priority sectors).

Role: CIB maintains centralized credit history records of borrowers across Nepal. Banks must obtain a mandatory CIB clearance report before approving any loan exceeding Rs. 5 Lakhs to identify blacklisted defaulters.

Step 1: Calculate Repricing Gap:

Step 2: Impact of 1.5% Interest Rate Rise:

Interpretation: Net Interest Income will decrease by Rs. 3 Crore because the bank has more liabilities repricing at higher rates than assets.

Step 3: Impact of 1.0% Interest Rate Fall:

Interpretation: Net Interest Income will increase by Rs. 2 Crore because interest paid on liabilities drops by more than interest received on assets.

1. Cost-Plus Loan Pricing Model:

Each element is explicitly factored into the loan contract.

2. Customer Profitability Analysis (CPA): Evaluates the total net profit derived from the overall customer relationship (all deposits, loans, fee services, advisory) rather than an individual isolated loan transaction.

Non-Deposit Sources:

1. Inter-bank Call Money: Short-term (1–7 days) borrowing from other banks to meet daily liquidity imbalances.
2. Repurchase Agreements (Repo): Selling government securities to NRB or other banks with an agreement to buy back at a set date/price.
3. Refinance Facilities from NRB: Concessional central bank loans for agriculture, energy, and export priority sectors.
4. Subordinated Debentures: Long-term bonds issued to raise Tier 2 capital.

Bank DuPont Decomposition:

Where: This segregates bank performance into operational profitability, asset generation capability, and financial leverage.

CRR Management:

• Banks must maintain 4% of total domestic deposit liabilities in cash balances with NRB on an average bi-weekly maintenance period.
• Daily closing balance must not fall below a minimum statutory floor (e.g. 70% of required reserve).
• Penalties: NRB imposes penal interest rates equal to bank rate + penalty percentage on shortfalls.

E-Banking Risks: Phishing, malware, unauthorized account takeover, ATM skimming, DDoS attacks disrupting digital payment gateways (mobile banking, ConnectIPS). Risk Controls: Multi-factor authentication (MFA, OTP, biometrics), end-to-end encryption (TLS/SSL), AI fraud detection, periodic vulnerability penetration tests (VAPT), 24/7 Security Operations Center (SOC).

Step 1: Calculate Duration Gap ($DG$):

Where $D_A = 4.5 \text{ years}$, $D_L = 2.0 \text{ years}$, $A = 1,000$, $L = 900$.

Step 2: Calculate Change in Market Value of Equity ($\Delta E$):

Interpretation: Because the bank has a positive duration gap (+2.7 years), when interest rates rise by 100 bps, the market value of assets falls by more than liabilities, resulting in a decline of Rs. 25.00 Crore in the bank’s net worth / equity.

1. Credit Appraisal: Comprehensive financial analysis (debt-service coverage ratio - DSCR, current ratio), business viability, promoter background check, mandatory CIB clearance report. 2. Documentation & Charge Creation: Loan agreement, promissory note, deed of mortgage (Dristi Bandhak) registered at Land Revenue Office (Malpot), personal/corporate guarantees. 3. Post-Disbursement Monitoring: Stock inspection, verification of end-use of funds, monitoring monthly turnovers in sales accounts, checking insurance policy validity. 4. Recovery & Legal Action: Issuance of 35-day public notice in national dailies, auction of mortgaged collateral, blacklisting under CIB, filing suit in Debt Recovery Tribunal (Karja Asuli Punaravedan Adalat).

1. Capital Requirements under NRB Basel III Framework:

• Minimum Common Equity Tier 1 (CET1): 4.5% of total risk-weighted assets (RWA).
• Minimum Total Tier 1 Capital: 6.0% of RWA.
• Minimum Total Capital Adequacy Ratio (CAR): 8.5% (Statutory total: 11.0% including buffer).
• Capital Conservation Buffer (CCB): 2.5% of Common Equity Tier 1 capital, raising the total minimum capital requirement to 11.0%.
• Counter-Cyclical Buffer (CCyB): Ranges from 0% to 2.5% during excessive credit growth cycles.
• Leverage Ratio: Minimum 4.0% non-risk-based tier 1 capital leverage constraint.

2. Significance for Nepalese Banking: Ensures banks hold enough high-quality loss-absorbing capital to withstand severe macroeconomic shocks without government bailouts.