Exclusive Analysis With Easy-to-Follow Data Table by ShareSansar

Only 5 commercial banks prepared to meet predicted minimum paid-up capital provision

Nepal Rastra Bank (NRB) is set to introduce measures in the upcoming monetary policy to force banks and financial institutions to raise their paid-up capital. Soon after releasing its monetary policy, the NRB will issue directives mentioning the amount banks and financial institutions have to maintain as their paid-up capital.

According to sources, under the new monetary policy, commercial banks will have to raise their paid-up capital to Rs 5 arba, development banks to Rs 2 arba, finance companies to around Rs 50 crore. As per the existing policy, commercial banks must have a paid-up capital of Rs 2 arba, development banks Rs 64 crore and finance companies 20 crore.

The table below shows that top five commercial banks are already in a position to meet the predicted paid-up capital provision and yet provide dividends to their shareholders. Those below them can raise their capital to a required level by announcing bonus shares or issuing rights shares. The ones at the bottom of the table have no choice but to seek out a merger or issue rights shares.

Rs in “000”

The last time the central bank issued directives to raise minimum capital was in 2005. The central bank had asked BFIs to increase their capital by July 15, 2013 (Asar, 2070). All the 32 commercial banks have already met the target set by the NRB’s 2005 monetary policy.  After the introduction of the monetary policy in 2005, the country’s share market got a sudden boost.

An increase in paid-up capital has several upshots: good companies can issue bonus shares, investors would be willing to purchase their rights shares, BFIs with weak financial health must opt for merger to meet the required base capital, etc. Investors are attracted to put in more money in stock market in the anticipation that the value of BFIs shares would go up several times.  

Following the NRB’s directive to increase their capital base, BFIs will have to collect money through bonus shares or issuing rights shares. But the gloom in the share market and the real estate sector spell bad news for BFIs who are lacking in capital as investors would be averse to buying their rights shares. Therefore, though weak BFIs can issue rights shares, the only plausible choice before them is to merge.

It is learnt that the NRB is pushing for increased paid-up capital in the new monetary policy to implement the merger policy it introduced two years ago as it is worried about the risks posed by financial institutions that have not been able to raise their capital to the required level.

In anticipation of such a policy, majority of BFIs have already entered a merger process or have set endorsing of a merger proposal as the main agenda for their upcoming AGMs. Those who are not entering a merger or have failed to do so are unlikely to provide cash dividends to shareholders as they would be more inclined to issue bonus shares as a way of reinvesting profits to increase their reserves. No bank will be allowed to offer cash dividends so long there is a deficit in the capital.

As per the NRB, if more institutions merge with each other, they can increase their capital without putting additional burden on investors.

It is learnt that the central bank had already hinted about its plans to the banks and finance institutions through informal channels. NRB is set to hold discussions with all the stakeholders soon after releasing the monetary policy.