Keshab Bahadur K.C.
Bank Supervision Department
Nepal Rastra Bank
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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
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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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Institution
“A” Class
“B” & “C” Class
“D” Class
Core Capital
(%)
Capital Fund
(%)
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10
5.5
11
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8
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Calculation Formula
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Prompt Corrective Action (PCA)
Trigger points for 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
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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 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
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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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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 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
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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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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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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
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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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