What it is
Not all assets are equally risky. Cash cannot default. A Nepal government bond is almost as safe. A loan to a business can go bad. A margin loan against shares can go bad fast.
Risk-weighted assets apply a weight to each: 0% for cash and government securities, 100% for a standard corporate loan, and higher weights for exposures NRB considers riskier. NRB adds amounts for operational risk and market risk too.
The result is a single number that says how much risk the bank is carrying. Capital ratios divide capital by it: a bank with the same total assets but more risky loans has a higher RWA and so a lower capital ratio.
How it is calculated
RWA = Σ (Asset exposure × Risk weight) for credit risk + Operational risk charge + Market risk charge, under NRB's Capital Adequacy Framework 2015.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's capital fund to RWA of 12.37% means its total regulatory capital is that percent of its risk-weighted assets. RWA itself is in the capital adequacy disclosure, not the main statements.
What good looks like
RWA ÷ total assets (the 'risk density') shows how risky the balance sheet is. A bank with a high density runs a riskier book and needs more capital per rupee of assets.
Watch out
- RWA grows when the bank lends, even with no new bad loans, which lowers the capital ratio.
- NRB can raise the weight on specific loan types (for example share-backed or real-estate loans) to cool them, which lowers ratios overnight.
- RWA is a regulatory calculation and is not shown on the balance sheet itself.
In Nepal
NRB's Capital Adequacy Framework 2015 (Basel III based) sets risk weights and the operational and market risk charges. NRB periodically changes weights on specific sectors through monetary policy and directives; check the current framework for exact weights.
Questions
Because cash, NRB balances and government bonds carry a 0% weight, and some other assets carry less than 100%.
Yes. Raising the risk weight on a loan type increases every bank's RWA for that type and lowers their capital ratios.