3.3.

5 Maintaining Capital
Adequacy
Maintaining Capital Adequacy Function:
● Capital Adequacy ratio ensure the efficiency and stability of a nation’s financial system
by lowering the risk of banks becoming insolvent. Generally,a bank with a high capital
adequacy ratio is considered safe and likely to meet its financial obligations.
● Capital adequacy framework developed by the Basel committee .Capital adequacy
requirement, which sets a framework on how banking and financial institutions should
handle their capital. The purpose of maintaining capital adequacy is to meet
obligations and other unexpected losses.
● Capital adequacy protects creditors in the event that a bank fails, and creates a
disincentive to excessive risk taking or shrinking by bank owners and managers.
● According to BAFIAs act 2073 chapter 6 provisions on Capital Fund and Liquid Assets
section (42)capital fund :((1) A bank or financial institution shall have to maintain a capital
fund in the ratio as prescribed by the Rastra Bank on the basis of its total assets or total
risk-weighted assets. The Rastra Bank may, while prescribing such ratio, also prescribe the
ratio of additional capital fund.
● (2) If any bank or financial institution fails to maintain the capital fund in accordance with
Sub-Section (1), the Board of Directors of such bank or financial institution shall have to
give information thereof to the Rastra Bank within one month.
(3) The information given pursuant to Sub-Section (2) shall also be accompanied by, inter
alia, the reasons for the failure to maintain the capital fund and the plans or programs prepared
by the Board of Directors to increase the capital fund and restore it to the position as
prescribed by the Nepal Rastra Bank.
 (4)On receipt of the information referred to in Sub section (2) and (3) if the Rastra
Bank deems the plan or program submitted by the Board of Directors reasonable, it
may give directive to the concerned bank or financial institution to implement such plans
or programs; and if any amendment or alteration is to be made in the proposed plans or
programs it may give a direction to the concerned bank and financial institution to
amend or alter such plan or programs stating the reasons for such amendment or
alteration, and to implement the same.
● NRB has issued the capital adequacy framework 2015 to class ‘A’
institution and capital adequacy framework 2007 to class ‘B’and ‘C’
institutions.These frameworks are based on Basel Capital Accord.
Submitted by
Name: Parwati G.T
Roll no: 39
9th semster