NRB Unveils Banking Sector's Liquidity and Capital Ratios From Class "A" to "D" Banks' Financial Soundness

Nepal Rastra Bank's recent release of liquidity and capital ratios as of the end of Baisakh has shed light on the financial soundness of banks categorized into Class "A," Class "B," Class "C," and Class "D." These ratios serve as vital indicators of a bank's ability to meet its short-term obligations, maintain adequate levels of liquid assets, and manage risks effectively.

1) Liquidity Ratios:

Liquidity ratios demonstrate the proportion of liquid assets and cash holdings in relation to a bank's total deposits. They offer insights into a bank's capacity to handle unexpected cash flow requirements or deposit withdrawals. Here is an overview of the liquidity ratios for each class of banks:

Class "A" Banks:

1. Cash & Bank Balance/Total Deposit: 6.85% This ratio indicates that Class "A" banks maintain approximately 6.85% of their total deposits as cash and bank balances. It signifies a moderate level of immediate liquidity to cover potential short-term obligations.
2. Investment in Gov. Securities/Total Deposit: 16.69% Class "A" banks allocate around 16.69% of their total deposits towards investments in government securities. This demonstrates a strategic approach to balancing liquidity needs while potentially generating returns on investment.
3. Total Liquid Assets/Total Deposit: 24.45% With a total liquid assets-to-total deposit ratio of 24.45%, Class "A" banks exhibit a healthy proportion of liquid assets in relation to their deposit base. This suggests a satisfactory level of financial flexibility and risk management capabilities.

Class "B" Banks:

1. Cash & Bank Balance/Total Deposit: 6.72% Class "B" banks maintain a similar cash and bank balance ratio as Class "A" banks, standing at 6.72%. This implies a comparable level of immediate liquidity to meet short-term obligations.
2. Investment in Gov. Securities/Total Deposit: 16.00% Compared to Class "A" banks, Class "B" banks allocate a slightly lower proportion (16.00%) of their total deposits towards investments in government securities. This indicates a more conservative investment approach while maintaining an adequate level of liquidity.
3. Total Liquid Assets/Total Deposit: 25.43% Class "B" banks exhibit a relatively higher total liquid assets-to-total deposit ratio of 25.43%, suggesting a stronger liquidity position compared to Class "A" banks. This signifies an enhanced ability to manage unexpected demands and potential risks.

Class "C" Banks:

1. Cash & Bank Balance/Total Deposit: 7.65% Class "C" banks demonstrate a higher cash and bank balance ratio of 7.65%. This indicates a comparatively stronger immediate liquidity position to address short-term obligations and potential deposit withdrawals.
2. Investment in Gov. Securities/Total Deposit: 19.47% Class "C" banks allocate approximately 19.47% of their total deposits towards investments in government securities. This higher allocation signifies a relatively more conservative investment strategy, emphasizing liquidity and security.
3. Total Liquid Assets/Total Deposit: 32.29% With an impressive total liquid assets-to-total deposit ratio of 32.29%, Class "C" banks exhibit a significantly stronger liquidity position. This indicates a robust ability to meet unexpected demands and absorb potential shocks in the financial market.

Class "D" Banks:

1. Cash & Bank Balance/Total Deposit: 6.86% Class "D" banks maintain a similar cash and bank balance ratio as Class "A" banks, standing at 6.86%. This suggests a comparable level of immediate liquidity to address short-term obligations.
2. Investment in Gov. Securities/Total Deposit: 16.67% Class "D" banks allocate around 16.67% of their total deposits towards investments in government securities, similar to Class "A" banks. This reflects a prudent approach to liquidity management and investment diversification.
3. Total Liquid Assets/Total Deposit: 24.70% Class "D" banks possess a total liquid assets-to-total deposit ratio of 24.70%, similar to Class "A" banks. This indicates a satisfactory liquidity position, enabling them to navigate short-term challenges effectively.

Capital Ratios:

Capital ratios measure a bank's capital adequacy, indicating the proportion of capital it holds in relation to its risk-weighted assets (RWA). These ratios assess a bank's ability to absorb losses and maintain financial stability. Here are the capital ratios for each class of banks:

Class "A" Banks:

1. Core Capital/RWA: 10.10% This ratio reveals that Class "A" banks hold core capital equivalent to 10.10% of their risk-weighted assets. Core capital represents a bank's highest-quality capital, providing a cushion against unexpected losses.
2. Total Capital/RWA: 12.95% Class "A" banks maintain total capital equal to 12.95% of their risk-weighted assets. Total capital includes both core capital and additional capital, offering a broader measure of a bank's financial strength.

Class "B" Banks:

1. Core Capital/RWA: 9.71% Class "B" banks maintain core capital equivalent to 9.71% of their risk-weighted assets, reflecting a comparable level of capital adequacy to Class "A" banks.
2. Total Capital/RWA: 12.55% Class "B" banks possess total capital equal to 12.55% of their risk-weighted assets, indicating a similar overall financial strength as Class "A" banks.

Class "C" Banks:

1. Core Capital/RWA: 15.07% Class "C" banks maintain a higher core capital ratio of 15.07% in relation to their risk-weighted assets. This signifies a relatively stronger capital position, offering increased resilience and protection against potential losses.
2. Total Capital/RWA: 17.20% With a total capital ratio of 17.20% in relation to risk-weighted assets, Class "C" banks exhibit a robust financial standing, indicating a comprehensive ability to absorb losses and maintain stability.

Class "D" Banks:

1. Core Capital/RWA: 10.16% Class "D" banks hold core capital equivalent to 10.16% of their risk-weighted assets, similar to Class "A" and Class "D" banks. This reflects a comparable level of capital adequacy.
2. Total Capital/RWA: 12.99% Class "D" banks possess total capital equal to 12.99% of their risk-weighted assets, indicating a similar overall financial strength as Class "A" and Class "B" banks.

The combination of liquidity and capital ratios provides valuable insights into the financial resilience and stability of banks across different classes. These ratios assist investors, regulators, and stakeholders in assessing a bank's ability to meet short-term obligations, maintain sufficient levels of liquid assets, and absorb potential losses.

The liquidity ratios have shown that Class "C" banks have exhibited the strongest liquidity positions, with higher cash and bank balance ratios, significant investments in government securities, and impressive total liquid assets-to-total deposit ratios. This suggests their ability to handle short-term obligations, manage unexpected demands, and navigate potential shocks in the financial market. On the other hand, Class "A" and "D" banks have demonstrated comparable liquidity positions, while Class "B" banks have displayed a relatively higher total liquid assets-to-total deposit ratio, indicating stronger liquidity positions than Class "A" banks.

Moreover, the capital ratios have indicated the adequacy of capital held by the banks in relation to their risk-weighted assets. Class "C" banks have shown a stronger capital position with higher core capital and total capital ratios, providing a solid cushion against potential losses. Class "A," "B," and "D" banks have demonstrated comparable levels of capital adequacy, ensuring their ability to absorb losses and maintain financial stability.

These ratios serve as crucial metrics for investors, regulators, and stakeholders in assessing the overall health and resilience of banks. They provide insights into a bank's capacity to meet short-term obligations, manage risks effectively, and maintain a stable financial position. The variations observed among the different classes emphasize the importance of understanding the specific strengths and weaknesses of each bank group when evaluating their performance and potential risks.

Overall, the combination of liquidity and capital ratios paints a comprehensive picture of the financial strength and stability of banks in the different classes. It enables stakeholders to make informed decisions, promote prudent risk management practices, and ensure the stability and resilience of the banking sector as a whole.

Authored by Praisha Shrestha