Banks Financially Sustainable Assignment

Question 1 – Keeping the Banks Financially Sustainable
Scenario (a) – The first scenario is at the beginning where both the banks i.e. Bank A and Bank B has
a deposit rate @ 3.5% and lending rate @ 4%. Further, the bank also issues Bank Bonds @ 3.8% and
the minimum Capital Adequacy Ratio to be maintained should be @ 10%. Accordingly, on working
on the details provided along with the assumption both the banks were able to earn profits of $ 0.6
along with the Capital Adequacy Ratio of Bank A and Bank B being 33.67% and 41.67%
respectively.
Scenario (b) - From Scenario (a), a nonperforming loan (NPL) appears i.e. NPL =1. So, What
adjustments (if any) should the bank owner make?
Answer - In the current scenario (b), both the Banks i.e. Bank A and Bank B have a Non Performing
Loan amounting to 1. Such Non-Performing Loan should be shown as footnote to the Balance sheet.
The banks were able to earn profits of $ 0.35 after taking into account the provision for Non-
Performing Loans (assumed to be @25%). The said provision for Non-Performing Loans has been
adjusted against the advances given by both the banks. Both banks were able to maintain the Capital
Adequacy Ratio being 34.05% for Bank A and 41.90% for Bank B. The said Capital Adequacy Ratios
are well within the limits as given in the assumption.
Scenario (c) - From Scenario (a), a nonperforming loan (NPL) appears i.e. NPL =3. So, What
adjustments (if any) should the bank owner make?
Answer - In the current scenario (c), both the Banks i.e. Bank A and Bank B have a Non Performing
Loan amounting to 3. The banks reported losses in the current scenario amounting to $ -0.15 after
taking into account the provision for Non-Performing Loans (assumed to be @25%). Both banks were
able to maintain the Capital Adequacy Ratio being 30.97% for Bank A and 37.74% for Bank B. The
said Capital Adequacy Ratios are well within the limits as given in the assumption.
Scenario (d) - From Scenario (a), a nonperforming loan (NPL) appears i.e. NPL =6 and the bank
issues new shares worth $ 3.99. So, What adjustments (if any) should the bank owner make?
Answer - In the current scenario (d), both the Banks i.e. Bank A and Bank B have a Non Performing
Loan amounting to 6. The banks reported losses in the current scenario amounting to $ -0.90 after
taking into account the provision for Non-Performing Loans (assumed to be @25%). Both banks were
able to maintain the Capital Adequacy Ratio being 38.61% for Bank A and 46.42% for Bank B. The
issue of new shares by the bank has been taken into account for calculating the Capital Adequacy
Ratio. The said Capital Adequacy Ratios are well within the limits as given in the assumption.