Duties and Obligations of Commercial Banks

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obligation of banks

Duties and Obligations of Commercial Banks – बैंकको दाइत्वहरु

The commercial banks need to fulfill the following obligation formulated by the Nepal Rastra Bank.

1) Maintaining Cash Reserve Ratio (CRR)

Cash reserve ratio (CRR) is the certain (%) amount of total deposit that needs to be deposited in the Central Bank. The bank should deposit the amount in the Nostro account of Nepal Rastra Bank.

The objective of maintaining the cash reserve is to prevent the shortage of funds in meeting the demand by the depositor. As per the direction of Nepal Rastra Bank (Central Bank), the amount of reserve to be maintained by commercial banks are as follows-

For A, B, C Banks = 4% of the total deposit

For D = 0.5% of the total deposit if deposit only from a member of the bank, otherwise 2% if deposit from external depositors.

2) Maintaining Statutory Liquidity Ratio (SLR)

The Statutory Liquidity Ratio (SLR) refers to the proportion of deposits the commercial bank is required to maintain with them in the form of liquid assets in addition to the cash reserve ratio.

For A = 10%
For B = 8%
For C = 7%
For D = 4%

3) Maintaining CD Ratio

Credit to Deposit Ratio (CD Ratio) is a commonly used statistic for measuring a bank’s liquidity by dividing the bank’s total loans by its total deposits. This number is expressed as a percentage. If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements, and conversely, if the ratio is too low, the bank may not be earning as much as it could be.

CD Ratio = Credit/Deposit * 100%

It should not be more than 80%.

4) Maintaining CCD Ratio

CCD Ratio is a credit to core capital cost and deposit ration.

CCD Ration = Credit/Core Capital Cost + Deposit * 100%

It should not exceed more than 80%.

5) Maintaining Paid-up Capital

A bank should maintain the following paid-up capital

ClassNamePaid Up Capital in CrorePrevious Provision
(Before 2072/73)
Provincial Level
ACommercial Bank800 Crore (8 Arab)200 Crore--------
BDevelopment Bank250 Crore64 Crore120 Crores
CFinance Company80 Crore30 Crore50 Crores
DMicro Finance 10 Crore10 Crore2 Crores

6) Maintaining CAR

Capital Adequacy Ratio (CAR) is a measurement of a bank’s available capital expresses as a percentage of a bank’s risk-weighted credit exposures.

Class Primary Capital Adequacy RatioTotal Capital Adequacy Ratio
A6%8.5%
B (national level)6%10%
B,C5.5 %11%
D4%8%

7) Maintaining Loan Classification of Provisioning

A bank should allocate the following loan loss provision.

Loan ClassificationMeaningProvision
Pass LoanNot overdue/Overdue up to 1 month
1%
WatchlistOverdue up to 3 month
i.e 1-3 months
5%
Sub-standardOverdue up to 6 months
i.e 3-6 months
25%
DoubtfulOverdue up to 1 year
i.e 6-12 months
50%
LossOverdue for more than 1 year100%
Restructuring and ReschedulingChanges made in loan timing (credit period) and terms and condition (other structure) in between12.5 % for Pass Loan
25% for substandard
50% for doubtful
100% for loss

8) Maintaining SOL

The Single obligor limit is the maximum amount a bank is allowed to lend a single borrower or an individual in relation to its total shareholder’s fund. Single obligor limit for Nepali commercial banks is up to 25% of primary capital for the funded and non-funded facility.

9) Follow Accounting Policy & Standard as Prescribed by NRB

Accounting can be done on a cash basis and mercantile/accrual basis. All the income are recorded in cash basis whereas expenses are recorded in mercantile or accrual basis.

10) Maintaining Corporate Governance

Each and every bank must follow the policy, rules, and regulation set by the Bank and Financial Institutions Act 2073, Nepal Rastra Bank Act 2058, Unified Directives of Nepal Rastra Bank and other regulatory bodies. Besides these regulatory bodies, a bank has it’s own internal policies which have to be followed in order to maintain the corporate governance.

11) Maintaining Reserve

Banks can allocate a certain amount of money in reserve if there is a high profit. Each year bank should allocate 20% of its profit in general reserve fund until it exceeds the double of its total paid-up capital. After exceeding the double of paid-up capital only 10% is allocated in general reserve fund.  Likewise, 25% of income from foreign exchange transaction will be allocated for the foreign exchange reserve fund.

12) Follow the Instruction of NRB

All the commercial banks must follow the rules and regulation set by the Nepal Rastra Bank.

These are the obligation of commercial banks.