What it is
When a bank earns profit, it does not hand all of it to shareholders. Some goes into reserves by law, some stays as retained earnings, and some is set aside for specific purposes.
Reserves plus share capital equals total equity. The split matters because only a small part, mainly retained earnings, is 'free' to be paid as dividends. The rest is locked.
The main children of this line are: general reserve (locked by BAFIA), retained earnings (free), and other reserves (regulatory, exchange, investment adjustment, share premium, revaluation).
How it is calculated
Total equity − share capital. Or: general reserve + retained earnings + other reserves.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's quarterly statement prints total equity of Rs 7,190.66 crore and share capital of Rs 3,205.70 crore; everything between the two is reserves and surplus. Retained earnings of Rs 516.91 crore is the one reserve the quarterly format itemises. The full split (general, regulatory, fair value and other reserves) appears only in the audited annual report.
What good looks like
Growing reserves over years show profit is being kept to strengthen the bank. For dividend questions, look at retained earnings, not the whole reserve.
Watch out
- Big reserves do not mean a big dividend; most reserves cannot be paid out.
- Bonus shares move money from reserves to share capital; total equity is unchanged.
- Regulatory reserve is money NRB has told the bank it cannot distribute.
In Nepal
BAFIA 2073 section 44 requires at least 20% of net profit to go to the general reserve until it equals twice the paid-up capital, then at least 10%. NRB's dividend procedure (2082) requires shortfalls between NFRS provisions and NRB provisions, and capitalised interest, to be parked in the regulatory reserve.
Questions
Mainly retained earnings, after the year's transfers to general and regulatory reserves. NRB must approve the dividend.
The bonus is paid out of reserves into share capital. Equity does not change; it moves between lines.