Measurement of Bank Capital

There is much benefit from the measurement of bank capital. It is very difficult to measure bank capital. Really, a capable bank must find out this thing continuously. It gives a try picture of a bank. The function of the measurement of bank capital is considered very important. The bank should pay attention to the work that it performs because a bank is a sensitive institution. The financial condition of a bank can be known from the measurement of bank capital. Measurement of the bank capital gives benefits to all parties. For this, it is necessary to know the ownership of the bank capital, borrowed capital, and capital funds. the amount collected from both of these sources is bank capital. In fact, the bank capital should be considered as a measurement of the adequacy of bank capital. It can be known from its own record. For it, first of all, the sources of equity or ownership capital should be found,

The following titles are the sources of ownership or equity capital

1. The amount collected by issuing ordinary shares.
2. The amount collected by issuing preference shares, however, to issue such shares prior permission of the NRB is compulsory.
3. The amount that the bank gains as a profit,
4. The investment made by a bank, profit which dies not distribute as dividend to its shareholders.
5. the amount that a bank has accumulated or deposited in all its reserve and saving funds.

The following are the sources of borrowed capital

1. The amount that the bank receives in all types of deposits.
2. The loan is taken by it from the central bank.
3. The loan is taken by it from any commercial bank or financial institution.

having knowing the above-given sources of borrowing or equity and borrowed capital, adequate that capital is checked up to find out the reality of capital from the above given both sources. To measures whether that capital is enough for a bank or not, the following methods or mechanisms are applied:

 CAPITAL RESERVE RATIO

Commercial banks should deposit at least 7 percent of their accumulated total deposit by opening an account in the Nepal Rastra Bank. In addition to it, they should deposit a cash amount of at least 3% of their total deposit in their own treasury. Thus, there is a legal provision that commercial banks should deposit 10% of total deposits as cash reserve ratio funds. The commercial bank cannon use the costs reserve fund discretionarily. Commercial banks cannot make monopoly decisions of their own will. Commercial banks have to follow the rules and regulations.

THE RESERVE FUND

The commercial banks should deposit an amount at the rate of 20% from the profit they earn in a fiscal year in the ordinary fund until their total ownership capital is doubled. This is a compulsory provision. The commercial banks must deposit this amount. It saves the bank from any risk probable in the future.

THE CAPITAL DEPOSIT RATIO

A bank carries out its transaction through the medium of ownership and borrowed capital. Naturally, the function of a bank requires a lot of capital. It is known as the basis of deposit in the bank, whether a bank has adequate ownership capital or not. IF there is 8% ownership capital of the total deposit of the bank, it is considered good.

THE CREDIT DEPOSIT RATIO

If 75 percent of the amount deposited by the customers is invested in various sectors, it is considered satisfactory. It is a good sign. In this way, from the above given four ratios, we can measure the capital of the bank to know whether it is adequate or not. Apart from the above given four ratios, we can measure the capital of the bank from the ratio of the loan that is not recovered in time. 

Thus, if all the ratios are maintained well, it is proved that bank capital is in adequate quantity. If the above-given ratios are not maintained and there is a scarcity of cash funds and there is a lack of capital, it is not a good sign. Therefore, from the above-given rations, we can measure bank capital. The adequacy of capital is necessary to run the bank. Thus, the above-given ratios have become effective means of soliciting such types of awareness.w