Keshab Bahadur K.C. Bank Supervision Department Nepal Rastra Bank 1

Supervision Models On-site Supervision CAMELS Off-site Supervision CAELS C = Capital A = Assets Quality M = Management E = Earnings L = Liquidity S = Sensitivity to Market Risk 2

3

Evaluation factors for Capital  Volume of poor quality of assets  Bank’s capital growth experience and future prospects  Ability to address emerging needs for additional capital  Risk exposures  Balance sheet composition  Quality and strength of earnings, earnings retention and reasonableness of dividend distribution  Ability of management to address emerging needs of capital  Comparison with the regulatory requirement and industry norms 4

Capital Ratios  Core Capital / Risk Weighted Assets  Total Capital / Risk Weighted Assets  Total Loans to a single Sector / Total Loans  Total Loans to a single sector / Core Capital  Fund Based Loans to a Single Borrower or Group of Related Borrowers / Core Capital  Non-Fund Based Facilities to a Single Borrower or Group or Group of Related Borrowers / Core Capital  Actual Provisioning / Required Provisioning  Net Earnings / Core Capital 5

6

Calculation Formula 7

Prompt Corrective Action ( PCA ) Level of CapitalTrigger Points Less than 2% 1 st Less than 2% - 4% 2 nd Less than 4% - 6% 3 rd Less than 6% - 8% 4 th More than 8% 5 th 8 Trigger points for PCA

9

Evaluation factors for Assets Quality  Level, severity, trend of problem, restructured and non performing loans  Adequacy of underwriting standards, soundness of credit administration practices and risk management  Adequacy of provisioning  Trend of off-balance sheet transactions Credit Risk  Diversification and quality of the loan and investment portfolios  Diversification or concentration in sectors or borrowers  Adequacy of loan and investment policies, procedures and practices  Recovery trend of problem assets (Bad Loan)  Adequacy of internal controls and management information system 10

Assets Quality Ratios 1. Past Due Loans (Non performing Loan)/ Total Loans 2. Past Due Loans to Total Loans / Industry Av of Past Due Loans to Total Loans 3. Provisioning for Substandard Loans / Total Substandard Loans 4. Provisioning for Doubtful Loans/Total Doubtful Loans 5. Provisioning for Loss Loans / Total Loss Loans 6. Total Loans to a Single Sector / Core Capital 7. Fund Based Loans to a Single Borrower or Group of Related Borrowers / Core Capital 8. Non Fund Based Loans to a Single Borrower or Group of Related Borrowers / Core Capital 9. Bank's investment in shares and securities of a company / Core Capital 11

12

Evaluation factors for Management  Ability of the board and management  Level and quality of oversight and support of all activities by the Board of Directors and management.  Educational background of staff, experience in banking, rate of employee transfer between departments, employee turnover, staff moral and harmony between management and staff.  Adequacy of audit and internal controls  Compliance with laws and regulations  Accuracy, timeliness and effectiveness of MIS and risk monitoring systems 13

14

Evaluation factors for Earnings  Level of earnings, including trends and stability  Quality and source of earnings  Adequacy of budgeting systems, forecasting processes and MIS  Adequacy of provisioning  Ability to contribute to capital through retained earnings 15

Earning Ratios 1. Net Income (after tax) / Annual Average of end-of- month Assets 2. Net Income (after tax) / Core Capital 3. Net Spread: (Interest earned/ Interest earning assets ) – (Interest paid/ Interest bearing Liabilities) 4. Net Interest Margin: (Interest Income – Interest Expense )/ (Annual Average of end-of month Total Assets) 5. Total Operating Income / Annual Av. Of end-of-month Total Assets 6. Total Operating Expenses / Annual Av. Of end-of-month Total Assets 16

Earning Ratios 7. Net Operating Income / Annual Av. Of end-of-month Total Assets 8. Total Operating Expenses / Total Operating Income 9. Interest on Deposits / Total Expenses 10. Interest on Borrowings / Total Expenses 11. Total Interest Expenses / Total Operating Income 12. Interest Income on Loans / Total Operating Income 13. Staff expenses / Total Expenses 14. Staff Expenses / Total Operation Income 17

18

Evaluation factors for Liquidity  Volatility, type, concentration and trend of deposits  Availability of assets readily convertible into cash  Access to money markets or other ready sources of fund  Trend and stability of deposits  Capability of the management to manage liquidity risk 19

Liquidity Ratios  Total Liquid Assets / Total Deposit  Net Liquid Assets/Total Deposit  Total Loan / Total Local Currency Deposit  Total Loan / Total Local Currency Deposit and Core Capital  Current Assets / Short Term Liabilities (with in 90 days)  Quarterly Gap (Maturity Mismatch) / Cash in Vault & NRB Balance  Quarterly Gap (Maturity Mismatch) / Core Capital  Tendency of Inter Bank Loan 20

21

Evaluation factors for Sensitivity to Market Risk  Sensitivity of the bank’s earning or economic value of capital to adverse changes in interest rates, foreign exchange rates, equity prices  Ability of the management to manage the market risk 22

Sensitivity to Market Risk Ratios  Interest Rate Risk: First Quarter Gap (A/L maturity mismatch)/Av. Quarterly Earnings  Interest Rate Risk: Second Quarter Gap (A/L maturity mismatch)/Average Quarterly Earnings:  Exchange Rate Risk: Net Foreign Exchange Position / Core Capital 23

24