NRB tells banks to raise paid-up capital to Rs 8 billion

Fri, Jul 24, 2015 12:00 AM on Others, Others,

KATHMANDU, July 24:

Nepal Rastra Bank (NRB) has directed the commercial banks to raise their paid-up capital by four times to Rs 8 billion by mid-July 2017.

Unveiling the Monetary Policy for Fiscal Year 2015/16 on Thursday, the central bank introduced the additional capital requirement for the banks and financial institutions (BFIs) 'to make their capital base stronger'. Currently, commercial banks are required to maintain a minimum paid-up capital of Rs 2 billion.

Paid-up capital refers to the amount of a bank's capital that has been funded by shareholders.

The new provision to increase the paid-up capital of BFIs will strengthen the capital base of the banking system and ensure financial stability, said NRB Governor Chiranjibi Nepal, unveiling the Monetary Policy 2015/16" "Increasing paid-up capital means to increase the capacity of the BFIs which is very much important for the sound financial health of the banking syste"," he added.

The central bank has also increased paid-up capital requirements for development banks and finance companies. According to the new provision, national-level development banks will be required to raise their paid-up capital to Rs 2.5 billion, while development banks that have working areas of 4-10 districts will have to raise paid-up capital to Rs 1.2 billion. Similarly, development banks that have working areas in 1-3 districts will have to increase their capital base to Rs 400 million.

National-level finance companies and other finance companies with working areas in 4-1- 10 districts will have to increase their capital base to Rs 800 million, while those finance companies with working areas of one to three districts will have to raise their paid-up capital to Rs 400 million. "

"The consolidation process of the banking industry that was started by the central bank a decade ago will reach to a logical end within next two yea"s," Maha Prasad Adhikari, a deputy governor of NRB, told Republic". "The provision of additional capital requirement will also help to ensure corporate governance in the BF"s," he said, adding that it will also help free a bank from the grip of a certain group or people, which will also help ensure corporate governance.

The decision to increase paid-up capital requirement, however, has irked bankers. They said it would be difficult to increase capital within short period of time.

"It is very impractical to ask BFIs to raise their paid-up capital by four times within a short period of two yea"s," Upendra Poudyal, president of Nepal Bankers Association, told Republica. "It does not bode well for the banking industry."

Banking experts say the new provision will compel BFIs to undergo merger and acquisition. "BFIs have to either go for merger and acquisition, issue rights/bonus shares or debentures, or issue Further Public Offer (FPO) to shore up their capital base," they said.

Shreejesh Ghimire, CEO of NMB Capital, said as BFIs are far behind the level of increased paid-up capital, they don't have any alternative to merger and acquisitio". "Floating rights and bonus shares or debentures and FPO will not be easy for them. The BFIs will be in rush for the merger and acquisition in the next two years in line with the vision of the central bank to create a bigger ba"k."

Of the class 'A' commercial banks, only state-owned Rastriya Banijya Bank Ltd (RBBL) and Agricultural Development Bank Ltd (ADBL) meet the minimum paid-up capital of Rs 8 billion. According to NRB, RBBL's paid-up capital stands at Rs 8.59 billion while ADBL has paid-up capital of Rs 9.64 billion as of mid-April.

Similarly, Nepal Bank Ltd, Global IME Bank and Nepal Investment Bank have paid-up capital of Rs 6.47 billion, Rs 5.01 billion and Rs 4.77 billion respectively, as of mid-April.

The central bank's diktat to increase paid-up capital of commercial banks had a positive impact on share market with the benchmark Nepse index gaining 40.11 points to close at 1003.38 points on Thursday.

Source: Republica