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Evaluating and Interpreting Banking Indicators

Keshab Bahadur K.C.Bank Supervision Department

Nepal Rastra Bank

Supervision ModelsOn-site Supervision CAMELS

Off-site Supervision CAELS

C = Capital

A = Assets Quality

M = Management

E = Earnings

L = Liquidity

S = Sensitivity to Market Risk

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C = Capital

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

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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

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Capital Adequacy

Institution Core Capital

(%)

Capital Fund (%)

“A” Class 6 10

“B” & “C” Class 5.5 11

“D” Class 4 8

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Calculation Formula

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Prompt Corrective Action (PCA)

Level of Capital Trigger Points

Less than 2% 1st

Less than 2% - 4% 2nd

Less than 4% - 6% 3rd

Less than 6% - 8% 4th

More than 8% 5th

Trigger points for PCA

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A = Assets Quality

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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

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Assets Quality Ratios1. 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

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M = Management

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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

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E = Earning

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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

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Earning Ratios1. 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

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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

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L = Liquidity

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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

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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

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S = Sensitivity to Market Risk

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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

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

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Thank you