45BBA-VIII: Financial Institutions and Markets-II, Unit-2: Regulations of Depository Institutions -Rajesh Gurung Problem No.

1 A commercial bank has the following components in its capital account: Rs. in million
Undivided Profits Rs.160 Surplus 35 Loan-Loss Reserves 280 Limited-Life Preferred Stock 5 How much tier-one (or core) capital does this bank have? Tier-two capital? (Ans. $370 and $310) Common Stock Perpetual Preferred Stock 10-year Subordinated Debt Equity Reserves Rs.110 15 25 50

Problem No2 First National Bank of Wimbley reports tier-one capital of $60 million and tier-two capital of $70 million, First National has assets of $10 million with a risk weight of zero, assets of $350 million with a 0.2 risk weight, assets of $680 million with a 0.5 risk weight, and assets of $1,010 million with a risk weight of 1.00 What is First Nationals total risk-weighted assets? Does the bank have enough tier-one capital? Enough total capital? Why or why not? (Ans. 4.2%, 4.9%, 9.1%)

Problem No.3 Suppose the bank has total assets of Rs.10,000 million in which the cash and bank balance is Rs.500 million, government securities Rs.500 million and deposit of financial institutions is Rs.1,000 million. Moreover, the investment consists of Rs.2000 million. The loans and advances consist of Rs. 4000 million. The fixed asset is Rs.200 million and other asset is Rs.1800 million. The core capital of the bank amounted to Rs.1200 million. Find the leverage ratio. (Ans. 12%) Problem No.4 Suppose the bank has total assets of Rs.50,000 million in which the cash and bank balance is Rs.2,500 million, government securities Rs.2,500 million and deposit of financial institutions is Rs.3,000 million. Moreover, the investment consists of Rs.12,000 million. The loans and advances consist of Rs.25,000 million. The fixed asset is Rs.1,200 million and other asset is Rs.3,800 million. The core capital of the bank amounted to Rs.6,000 million and supplementary capital is Rs. 800 million. Find the leverage ratio. (Ans. 14%, 1.8% 15.9%) Problem No.5 The total risk weighted assets of a bank amounted to Rs.1582.6 million. The off-balance sheet items constitute 3.9 percent of total risk weighted assets. Find the on-balance sheet assets based on total risk weighted assets. b. If the total capital employed amounted to Rs.202.4 million. What would be the position of core capital if supplementary capital constitutes 7.42 percent of total capital employed. c. Considering both (a) and (b), what would be capital adequacy ratio taking both Tier 1 and Tier 2 capital. Do you think that capital adequacy ratio as per (c) is satisfactory under Basel accord.
(Ans. a. Rs.1520.88 , b. Rs.187.38, c. 12.78%, d. Yes.)

a.

d.

1 Prepared for students of BBA 8th Semester, T.U.

Problem No.6 Following is the information taken from selected joint venture banks for the year 2005/06. Rs. in million
Banks Standard Chartered NABIL Himalayan Nepal Investment Bank of Kathmandu NIC Siddhartha Development Capital Tire 1 Tire 2 Rs.1606.9 Rs.237.7 1,830.8 258.5 1,721.9 520.9 1,393.3 700.9 811.9 1,110.1 781.2 275.7 593.2 39.0 Risk Weighted Assets On-Balance Off-Balance Rs.10,332.0 Rs.2,047.5 14,532.0 2,444.2 17,550.2 2,368.0 14,281.6 3,210.0 5,871.6 1,065.4 7,380.4 275.8 4,840.7 803.1

From the above table, (a) find out capital adequacy ratio and (b) how do you evaluate the capital adequacy ratio and give your opinion with comparative analysis. What measure should be taken if you consider necessary to improve the capital base. (Ans. SCB =14.91%; NABIL = 12.31%; HB =
11.27%; NIB = 11.98%; BOK = 14.52%; NIC = 13.54%; SDB = 14.16%)

Problem 7 The financial information as on July 2009 of Nepal SBI Bank Ltd. are as follows. i. Information relating to risk weight exposure for credit risk (in million Rupees) A. On-Balance Sheet Exposures Net Risk Value Weight, % Cash balance 652.03 0 Balance with Nepal Rastra Bank 444.14 0 Investment in Nepalese government securities 2,933.85 0 Investment in Nepal Rastra Bank securities 372.73 0 Claim on public sector equity (ECA 7) 114.38 150 Claims on domestic banks that meet capital 166.99 20 adequacy requirements Claims on domestic banks that do not meet 38.59 100 capital adequacy requirements Claims on foreign banks (ECA 0.1) 378.15 20 Claims on foreign banks (ECA 2) 4.92 50 Claims on foreign bank incorporated in SAARC 375.96 20 region Claims on domestic corporate 8,737.97 100 Regulatory retail portfolio (not overdue) 1,955.87 75 Claims fulfilling all criterion of regulatory retail 83.65 100 except granularity Claims secured by residential properties 2,574.46 60 Claims secured by residential properties 21.97 100 (overdue) Claims secured by commercial real estate 135.64 100 Past due claims (except for claim secured by 47.47 150 residential properties) High risk claims 825.97 150 Investments in equity and other capital 23.26 100 instruments of institutions listed in stock 2 Prepared for students of BBA 8th Semester, T.U.

exchange Other assets-interest receivable/claim on gov securities Other assets-cash and cash in transit items Other assets (as per attachment) Total on-balance sheet B. Off-Balance Sheet Exposure Bills under collection LC commitments with original maturity up to 6 months domestic counterparty Bid bond, performance bond, and counter guarantee domestic counterparty Guarantee invoked but yet to be honored Advanced payment guarantee Financial guarantee Acceptances and endorsements Irrevocable credit commitments (short term) Total off-balance sheet Total (A + B)

35.21 146.84 546.04 20,616.08 48.05 2,154.14 1,260.08 0.33 29.67 39.07 203.94 1,370.47 5,105.75 25,721.83

0 20 100 0 20 50 200 100 100 100 20

ii. Information relating to bank capital (in million Rupees) 1 Core Capital (Tier I) a Paid up equity capital b Proposed bonus equity share c Statutory general reserve d Retained earnings e Capital adjustment fund f Debenture redemption fund g Deferred tax reserve h Less : Miscellaneous assets not written off i Less : Investment arising out of underwriting commitments 2 Supplementary Capital (Tier II) a Subordinated term debt b Pass loan loss provision c Exchange equalization fund Total Capital Fund (Tire I and Tier II)

1,692.37 874.53 349.81 304.52 3.85 65.00 85.71 18.99 -0.34 -9.69 319.67 160.00 149.47 10.20 2,012.04

iii. Information relating to operational risk (in million Rupees) Particulars Year 1 Year 2 Year 3 (2006/07) (2007/0 (2008/09) 8) Net interest income 418.86 515.59 635.75 Commission and discount income 52.59 50.92 78.84 Other operating income 12.60 19.56 52.79 3 Prepared for students of BBA 8th Semester, T.U.

Exchange fluctuation income Additional interest suspense during the period

49.46 28.43

51.99 44.93

61.29 (211.61)

iv. Information relating to market risk (in million Rupees) S. No. Currency Open Position Open Position (FCY) (NPR) 1 INR 15.80 1.60 2 USD (0.06) 77.90 3 GBP (0.03) 127.94 4 EURO (0.33) 109.35 5 JPY (0.31) 0.83 6 AUD (0.06) 62.46 Please use the other necessary information as in defined in current NRB capital adequacy framework and calculate followings: a. Risk weighted exposure for credit risk b. Risk weighted exposure for operational risk c. Risk weighted exposure for market risk d. Total risk weighted assets e. Tier I, Tier II, and total capital ratio f. Do you think that the bank has proper capital ratio as per demanded by NRB? Explain. Solution a. Calculation of risk weighted exposure for credit risk (Rs in million) On-Balance Sheet Exposures Net Value Risk Risk (1) Weight, Weight % Exposur (2) e (1x2) Cash balance 652.03 0 0 Balance with Nepal Rastra Bank 444.14 0 0 Investment in Nepalese government 2,933.85 0 0 securities Investment in Nepal Rastra Bank securities 372.73 0 0 Claim on public sector equity (ECA 7) 114.38 150 171.57 Claims on domestic banks that meet capital 166.99 20 33.40 adequacy requirements Claims on domestic banks that do not meet 38.59 100 38.59 capital adequacy requirements Claims on foreign banks (ECA 0.1) 378.15 20 75.63 Claims on foreign banks (ECA 2) 4.92 50 2.46 Claims on foreign bank incorporated in 375.96 20 75.19 SAARC region Claims on domestic corporate 8,737.97 100 8,737.97 Regulatory retail portfolio (not overdue) 1,955.87 75 1,466.90 Claims fulfilling all criterion of regulatory 83.65 100 83.65 retail except granularity 4 Prepared for students of BBA 8th Semester, T.U.

Claims secured by residential properties Claims secured by residential properties (overdue) Claims secured by commercial real estate Past due claims (except for claim secured by residential properties) High risk claims Investments in equity and other capital instruments of institutions listed in stock exchange Other assets-interest receivable/claim on gov securities Other assets-cash and cash in transit items Other assets (as per attachment) Total on-balance sheet

2,574.46 21.97 135.64 47.47 825.97 23.26

60 100 100 150 150 100

1,544.68 21.97 135.64 71.21 1,238.96 23.26

35.21 146.84 546.04 20,616.08

0 20 100 `

0 29.37 546.04 14,296.4 9

Off-Balance Sheet Exposure Bills under collection 48.05 0 0 LC commitments with original maturity up 2,154.14 20 430.83 to 6 months domestic counterparty Bid bond, performance bond, and counter 1,260.08 50 630.04 guarantee domestic counterparty Guarantee invoked but yet to be honored 0.33 200 0.66 Advanced payment guarantee 29.67 100 29.67 Financial guarantee 39.07 100 39.07 Acceptances and endorsements 203.94 100 203.94 Irrevocable credit commitments (short 1,370.47 20 274.09 term) Total off-balance sheet 5,105.75 1,608.30 Total risk weighted risk exposure for credit risk (A + B) 15,904.7 9 b. Calculation of risk weighted exposure for operational risk (Rs in millions) Particulars Year 1 Year 2 Year 3 (2006/0 (2007/0 (2008/09) 7) 8) Net interest income 418.86 515.59 635.75 Commission and discount income 52.59 50.92 78.84 Other operating income 12.60 19.56 52.79 Exchange fluctuation income 49.46 51.99 61.29 Additional interest suspense during the 28.43 44.93 (211.61) period Gross income (a) 561.94 682.99 617.06 Fixed percent (b) As per given by current 15% 15% 15% regulation Fixed percentage of gross income [c = (axb)] 84.29 102.45 92.56 Capital requirement for operational risk (d) 93.10 5 Prepared for students of BBA 8th Semester, T.U.

(average of c) Risk weight (reciprocal of capital requirement of 10%) in times (e) Risk weighted exposure for operational risk [f=(dxe)]

1 0 931.00

c. Calculation of risk weighted exposure for market risk (Rs in millions) S. Currency Open Open Open Relevant No. Position Position Position Open (FCY) (NPR) (NPR) Position 1 INR 15.80 1.60 25.28 25.28 2 USD (0.06) 77.90 (4.67) 4.67 3 GBP (0.03) 127.94 (3.84) 3.84 4 EURO (0.33) 109.35 (36.09) 36.09 5 JPY (0.31) 0.83 (0.26) 0.26 6 AUD (0.06) 62.46 (3.75) 3.75 Total open position (a) 73.89 Fixed percentage (b) 5% Capital charge for market risk [c=(axb)] 3.69 Risk weighted (reciprocal of capital requirement of 10%) in 10 times (d) Risk weighted exposure for market risk [e=(cxd)] 36.95 d. Calculation of total risk weighted assets (Rs in millions) Total risk weighted risk exposure for credit risk Risk weighted exposure for operational risk Risk weighted exposure for market risk Total risk weighted assets e. Calculation of capital adequacy ratio
T ier II capital T ire II capital ratio = T tal risk w o eighted assets =

15,904.79 931.00 36.95 16,872.74

319 .67 = 0.018 =1.89 % 9 16 ,872 .74

Total capital ratio =

Total capital 2,012 .04 = = 0.1192 =11 .92 % Total risk weighted assets 16 ,872 .74

f. As per current regulatory provision, the banks must hold at least 6 percent Tier I capital of risk-weighted assets and at least 10 percent total capital of risk-weighted assets. Here, the calculated Tier I and Tier II ratios are 10.03 and 11.92 percent respectively. In totality, bank has maintained the significant capital ratio.

6 Prepared for students of BBA 8th Semester, T.U.