Banks ordered to slash investments in shares

KATHMANDU, AUG 21 -

Nepal Rastra Bank (NRB) has ordered banks and financial institutions (BFIs) to slow down with their investments in the share market.

Issuing a directive on Wednesday, the central bank said BFIs could invest a maximum of 1 percent of their core capital in held-for-trading securities. These are shares or bonds bought with the sole purpose of selling them at a profit after a short period of time. In case BFIs have invested more than 1 percent of their core capital in held-for-trading securities, they are required to bring it down within the stipulated limit by mid-July 2015.

According to the central bank, BFIs have lately been making increasing investments in the shares of listed companies, particularly insurance companies.

“Usually, investment in the shares of companies for short-term gain is a risky affair for BFIs. That’s why we have put a limit on such investments,” said a senior NRB official. “Another reason is that the first purpose of BFIs is financial intermediation, and increased trading activities could undermine their primary job.”

Even Basel III, the global regulation for the banking sector, has cautioned against such investments. With BFIs awash in liquidity for failure to lend adequately, they have been turning to the shares of various companies as potential investments.

BFIs have complained that they were compelled to invest in shares since their lending is way behind deposits and earnings from treasury bills is insignificant as the interest rate is less than 0.1 percent.

Meanwhile, the central bank has encouraged BFIs to invest in the primary shares of micro-finance institutions (MFIs). As per the NRB directive, BFIs can now count their investment in the promoter shares of MFIs as deprived sector lending. The central has become flexile on deprived sector lending since MFIs have not been able to absorb the funds they get from BFIs to invest in rural areas and poor communities.

NRB has not increased the ratio of deprived sector loans this year through the monetary policy even though it had initially planned to hike it by 0.5 percentage point.

Meanwhile, NRB has forbidden BFIs from using the cash in the capital adjustment fund for other purposes except issuing bonus shares. The central bank has allowed the money left in the redemption reserve of BFIs after repaying the liabilities under preference shares to be transferred into the capital adjustment fund.

Source: The Kathmandu Post