What it is
A bank lends depositors' money. If loans go bad, someone must absorb the loss before depositors do. That someone is the bank's own capital.
The capital adequacy ratio asks: how big is that cushion compared with the risk the bank is carrying? Risk is measured by 'risk-weighted assets' (RWA): each asset is multiplied by a weight for how risky it is. Cash and government bonds weigh 0%; an ordinary business loan weighs 100%; some loans weigh more.
Capital fund = Tier 1 (core: share capital, reserves) + Tier 2 (supplementary: qualifying debentures, general loan loss provision). Divide by RWA to get the ratio.
NRB's Capital Adequacy Framework 2015 sets a minimum total capital ratio of 8.5% plus a 2.5% capital conservation buffer, so 11% in practice for commercial banks. The 2015 framework also allows a countercyclical buffer of up to 2.5%, which NRB has kept suspended.
How it is calculated
Capital fund to RWA (%) = (Tier 1 capital + Tier 2 capital) ÷ Total risk-weighted assets × 100.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL reported a capital fund to risk-weighted assets ratio of 12.37% at the end of FY 2082/83 Q4, against NRB's 11% requirement. Its Tier 1 ratio was 9.68% and CET1 8.87%.
What good looks like
Comfortably above 11% with room to spare. A bank sitting just above the line cannot grow loans or pay cash dividends freely; it must raise capital first. Much higher is safe but may mean capital is sitting idle.
Watch out
- Share capital alone is not 'capital fund'; the ratio uses the full regulatory definition.
- A bank near 11% often pays bonus shares instead of cash to build capital.
- The ratio falls when loans grow fast, even with no new losses, because RWA grows.
- Quarterly ratios are unaudited; year-end audit adjustments can lower it.
In Nepal
NRB Capital Adequacy Framework 2015 (Basel III based): minimum CET1 4.5%, Tier 1 6%, total capital 8.5%, plus a 2.5% capital conservation buffer, giving 11% total; a countercyclical buffer of up to 2.5% is provided for but suspended by NRB directive. Cash dividends require meeting CAR, and an NRB directive asked for an additional 1% buffer for cash dividends. Falling below triggers Prompt Corrective Action under NRB's PCA Bylaws 2017 (dividend ban, branch and pay freezes).
Sources
- Capital Adequacy Framework 2015 minimums (CET1 4.5%, Tier 1 6%, total 8.5% + 2.5% buffer = 11%), Sharesansar
- 11pc capital adequacy ratio must for banks from mid-July (2015), Himalayan Times
- NRB PCA under Prompt Corrective Action Bylaws 2017 (capital shortfall), Nepsetrading
- Extra 1% buffer for cash dividend, Sharesansar
Questions
NRB applies Prompt Corrective Action: no dividends or bonus shares, limits on new branches and lending, and a recapitalisation plan is required.
Roughly, the cushion is twice as thick. But very high ratios can mean the bank is not lending enough to earn a good return.
Bonus shares keep profit inside the bank as capital, which lifts this ratio. Cash dividends reduce capital.