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Unified Directives 2067 English UNIFIED DIRECTIVES Issued by Nepal Rastra Bank to the Licensed Banks and Financial Institutions, 2010 (Revised with inclusion of the Unified Directives, 2009 and the Circulars/Directives/Guidelines issued until July 16, 2010; Effective from July 17, 2010) NEPAL RASTRA BANK CENTRAL OFFICE BANKS AND FINANCIAL INSTITUTIONS REGULATION DEPARTMENT JULY 2010 Content S. No. Subject Page No 1. Provisions Relating to Capital Adequacy 1 2. Provisions Relating to Classification of Loans/advances and Loan Losses 45 3. Provisions Relating to Single Borrower and Limitation of the Sectoral Credit and 67 Facilities 4. Provisions Relating to Accounting Policies and Format of Financial Statements 81 5. Provisions Relating to Mitigation of Risks in Transactions of Licensed Institutions 182 6. Provisions Relating to Good Corporate Governance 194 7. Provisions Relating to Timeframe for Implementation of Regulatory Directives 213 Issued in connection with Inspection and Supervision 8. Provisions Relating to Investment 217 9. Provisions Relating to Filing of Statistical Returns by Licenced Institutions to Nepal 224 Rastra Bank 10. Provisions Relating to Transfer or Sale of Promoters Shares of licensed institutions 289 11. Provisions Relating to Consortium Financing 306 12. Provisions Relating to Credit Information and Blacklisting 315 13. Provisions Relating to Compulsory Reserve/Statutory Liquidity 358 14. Provisions Relating to Opening of Branch/Offices 372 15. Provisions Relating to Interest Rates 389 16. Provisions Relating to Collection of Financial Resources 392 17. Provisions Relating to Lending to Deprived Sector 401 18. Provisions Relating to Amalgamation, Merger and Upgrading 411 19. Provisions Relating to Know Your Customers 425 20. Provisions Relating to Subsidiary Companies 433 21. Miscellaneous Provisions 439 Nepal Rastra Bank Central Office Banks and Financial Institutions Regulation Department Directive No. 1/067 Subject: Provisions Relating to Capital Adequacy Ratio The following Directives with regard to the capital adequacy ratio to be maintained by a licensed institution have been issued having exercised the powers conferred by Section 79 of the Nepal Rastra Bank Act, 2002. 1. The capital adequacy to be maintained Based on its risk-weight assets, a licensed institution shall have to maintain the following capital adequacy ratio: - Institution Minimum capital fund to be maintained based on the risk-weight assets (percent) Core capital capital fund "A" Class 6.0 10.0 "B" and "C" Class 5.5 11.0 "D" class 4.0 8.0 2. Capital fund Capital fund means the aggregate of core capital and supplementary capital. In case of the licensed institution belonging to class "A", the calculation of capital fund shall be made as referred to in schedule 1.1 of the Capital Adequacy Framework, 2007 (updated in July, 2008) issued by this Bank. 3. Classification of capital fund For the purpose of calculation of capital fund, the capital fund of a licensed institution shall have to be classified in two categories as follows:- 1. Core capital 1.1 The amount in the following heads shall be included/calculated in the core capital:- a. Paid up capital (ordinary share) b. Proposed bonus share 1 c. Share premium d. Irredeemable preference shares e. General Reserve Fund f. Accumulated Profit/loss g. Capital Redemption Reserve h. Capital Adjustment Fund i. Calls in advance j. Other free reserves 1.2 The amounts in the following heads shall be deducted while calculating core capital:- a. Goodwill b. Amount invested in shares and securities of corporate bodies exceeding the limit imposed by this Bank. c. All amount of investment made in shares and securities of the corporate bodies having own financial interests. d. Fictitious assets For this purpose, fictitious assets mean the fictitious expenses other than the expenses in research, development and computer software. e. Credit and facilities made available to persons and groups prohibited by the prevailing laws. Provided that in case the prevailing law has not prohibited to providing loan and facilities to such person or groups at the time of making available loans and facilities, this provision shall not be applicable until one year of such prohibition or expiry of the date of repayment of the loan, whichever is earlier. f. The amount of purchasing of land and houses for self purposes not abiding by Directives of this Bank. 2 g. The amount invested in residence, buildings construction and land development exceeding the limit. h. The share underwriting not could be sold within the prescribed time-limit. 2. Supplementary capital With a condition of not allowing to include more than core capital, the amount under the following heads shall be included in the supplementary capital: a. Provisions for general loan loss Only the amount provisioned for pass loan has to be included under this heading. In case more loan loss provision has been made than the ratio specified by this Bank for pass and other loans, the amount of such additional loan loss provision may be included in the additional loan loss provision. Provided that the total amount under such heads shall not be allowed to be included in the supplementary capital so that it would exceed 1.25 percent of the total risk-weight assets. b. Assets Revaluation Fund While calculating supplementary capital, it shall be allowed to be calculated only up to 2 percent of the total supplementary capital including the amount for assets revaluation fund. Only the amount remaining in this fund or 2 percent of the total supplementary capital, whichever is lesser, shall be included in this fund. c. Hybrid capital instruments The following instruments shall be included under this head:- (1) The issued securities which are unsecured, fully paid up and subordinated to the priority order of payment of depositors and creditors and available to absorb loses as well as liable or not liable to be changed in general capital; (2) Instruments issued on the condition that they are not redeemable at the option of the holder except with the approval of Nepal Rastra Bank. Provided that no other licensed institution shall be allowed to hold (purchase) the hybrid capital instruments issued by one licensed institution. d. Unsecured Subordinated term loan: 3 The debt instruments having the maturity period of more than five years and issued without any collateral security with a condition of getting payment after the depositors and the redeemable preference shares having limited maturity period shall be included under this class. In order to reflect the diminishing value of there instruments, the licensed institution shall have to apply the discount (amortization) factor of these instruments at the rate of 20 percent for the last five years. In case any bank or financial institution has issued such instruments with a condition of converting them into ordinary shares in the long run or in various phases or of redeeming them having fulfilled the prescribed terms and conditions, then the amount converted in ordinary shares may be calculated as supplementary capital and the amount not converted into shares may be calculated as supplementary capital by placing under this head. Provided that while issuing such instruments, the amount more than fifty percent of the core capital shall not be raised. e. Exchange Equalization Fund The amount of the exchange equalization fund maintained by a licensed institution engaged in the transaction of foreign exchange may be calculated for the purpose of supplementary capital. f. Investment Equalization Fund The amount of the investment equalization fund created under Directive No. 8 may be calculated for the purpose of supplementary capital. 4. Total Risk-weight Assets For the purpose of calculating capital fund, the total risk-weight assets have been classified in the following two categories: (1) On-balance-sheet risk-weight assets (2) Off-balance-sheet risk-weight transactions 5. Risk-weight in the on-balance-sheet assets and off-balance-sheet transactions. (1) Risk-weight in the on-balance-sheet assets 4 (Except class "A"): For the purpose of calculating the capital fund, the on- balance-sheet assets have seen divided as follows with assigning separate risk- weight:- On-balance-sheet heads Risk Weight (percentage) Cash deposits 0 Gold deposit (tradable) 0 Deposits with Nepal Rastra Bank 0 Investment in Government of Nepal bond 0 Investment in Nepal Rastra Bank bond 0 Fixed receipt pledged loan extended against one’s 0 own fixed receipt to be most secured Loan extended against security of government bond 0 to be most secured Accrued interests for government bond 0 Amount deposited by classes “B” and “C” licensed 0 institutions in the Youth and Small Entrepreneurs Self-employment Fund under the Deprived Sector Lending Claims of deposits/fixed receipts at the domestic 20 * banks and financial institutions * The fixed deposit of a period of three months or more made by the licensed financial institution of classes "B", "C" and "D" in a national bank or financial institution with a condition of redeeming it on an extended notice of one week. For this purpose, only the fixed deposit made in the bank and financial 5 Fixed receipt pledged loan extended against fixed 20 receipts of other banks and financial institutions to be most secured Deposits with foreign banks 20 Money at call 20 Loan extended against guarantee of internationally 20 rated licensed institution*/ Other investment made in internationally rated 20 Banks*/ Inter-bank lending 20 Investment in shares, debentures and bonds 100 Other investments 100 Total amount (including loans, credit, and bills 100 purchase/discount)** Fixed assets 100 Other net interests amount to be received institution which has maintained the prescribed capital adequacy based on the capital adequacy of just preceding trimester shall be recognized. */ For this purpose, the bank means the banks included in the list of the top thousand world banks in the just preceding year published in the month of July every year by the Banker magazine to be published from London, the United Kingdom of Great Britain.
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