Tag: market

Greetings everyone!

So the market has been surrounded with nica ko controversy since last few weeks. I’ll try to give my insights from what I’ve found, researched and analysed.

First thing first , I doubt that it’s going to bankrupt the bank or something because it’s more of a compliance issue and not something like asset liability mismatch which will bankrupt a bank.

Banks are required to hold certain capital against their asset or loans. For instance 8.5% of core capital means that the bank must have rs8.5 for every 100rs of loan. However, how you define the loan is different thing. Based on the riskiness and priority, all loans aren’t considered Equal. An investment of 100 in government securities will not require 8.5rs of capital because it’s considered risk free. Similarly, disbursement of 100rs of credit to corporations will require a capital of 8.5rs. similarly, if the 100rs credit is backed by residential mortgage then then capital required will be 4.25rs . So if I can somehow classify most of my credit with residentially backed mortgages, I would need less capital that the other bank

NICA basically played with these stuffs. They reduced the exposure towards retail and commercially backed loans with residential. Meaning that the bank was able to show that it needed less capital that what would have been actually required. This has multiple benefits for NICA, it would need less capital, will allow them to increase the credit more, etc.

However, bank goes bankrupt when there’s asset liability mismatch. Which is not the case here. It’s also not the case of excessively high npa though I believe the actual npa is easily above 3%. I believe that nrb should impose strict fines and penalties to the bank but it ends about here.

Rumours and controversies of bank run won’t do any good for the system or the economy, hence just wanted to clear it out. Atleast the investment community must be in their senses.

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