Half the banks need to increase capital

KATHMANDU, FEB 13:

More commercial banks are likely to issue debentures in the near future as half the number of banks need to jack up their capital to expand their lending capacity.

Among the 32 commercial banks that are in operation, the Capital Adequacy Ratio (CAR) of 16 is just above 10 per cent — the mandatory regulatory requirement. A lower CAR not only compromises the solvency of banks in case of emergencies, but also constricts their capacity to float loans.

Since banks are unable to increase their capital in the short term, they issue debentures to expand their lending capacity.

“Capital adequacy ratio measures the amount of a bank’s capital in relation to

the amount of its risk weighted credit exposures. The amount of capital with commercial banks limit their capacity to float loans which are considered risk weighted assets,” pointed out spokesperson for Nepal Rastra Bank (NRB) Bhaskar Mani Gyanwali.

The higher the capital adequacy ratio a bank has, the greater the level of unexpected losses it can absorb before becoming insolvent, that is why the central bank is strict about CAR, he added.

Banks seek to raise funds through debt instruments to maintain the capacity to extend loans, which has accelerated in the last few years.

The debentures issued by banks are included under Tier II capital — supplementary capital — of the issuing bank that increases the bank’s capacity to float more loans without increasing capital.

Nepal SBI Bank and Laxmi Bank issued debentures worth Rs 800 million recently. Everest Bank has also applied for debenture issue with the capital market regulator.

Moreover, commercial banks also have the option of issuing rights shares and bonus shares to increase their capital. But to capitalise on bonus shares, banks have to earn profits while rights issue is a long procedure.

Recently, Nepal Rastra Bank even forbade banks with less than 11 per cent CAR to distribute cash dividends despite making profits.

The central bank has asked commercial banks to maintain one per cent as buffer. A few banks had to revise the declared dividend following the central bank’s directive.

Among the 32 commercial banks, Agriculture Development Bank has the highest CAR of 18.93 per cent due to its capital of Rs 9.4 billion. The CAR of the other two government owned banks — Rastriya Banijya Bank and Nepal Bank Ltd — is still negative despite increased capital.

Banks can also opt for a merger with another financial institution that will increase their paid up capital.

However, a merger could also increase the amount of risk-weighted assets.

Source: THT