Number of commercial banks to go down by half
KATHMANDU, July 28:
The new capital requirement for bank and financial institutions (BFIs) is going to reduce the number of commercial banks to around 15 to 20 by the end of Fiscal Year 2017/18 from existing 30.
Nepal Rastra Bank (NRB) announced the new capital requirement amid concerns in the financial sector that the number of BFIs was too high for the current economic size, and that they are operating with low capital base that is clipping their wings to extend loan aggressively or withstand any major financial shock. - See more at: http://myrepublica.com/economy/item/25305-number-of-commercial-banks-to-go-down-by-half.
As of mid-April 2015, there are 30 commercial banks, 81 development banks, 52 finance companies and 36 micro finance development banks in the country.
Unveiling the monetary policy for Fiscal Year 2015/16 last week, NRB raised the minimum capital requirement for banks to Rs 8 billion from current Rs 2 billion. The banks will now have to raise paid-up capital in the next two years. The central bank has also increased the minimum capital requirement for development banks and financial institutions.
According to banking experts, there will be 15 to 20 commercial banks with combined paid-up capital of around Rs 120 billion by 2017/18. Three state-owned banks will remain as usual as they have already met the required paid-up capital. Similarly, three joint venture banks and seven commercial banks will raise capital on their own through bonus or rights shares. Remaining 16 commercial banks will have to undergo merger with five to six BFIs to meet the capital requirement.
Though the NRB's move has irked bankers, it was expected. The five-year Financial Sector Development Strategy prepared by NRB has recommended changing the current classification of class 'A' commercial banks, class 'B' development banks, class 'C' finance companies, and class 'D' microfinance companies. It has suggested reclassifying BFIs.
The new requirement will compel most of the BFIs to pursue merger or acquisition to meet the minimum paid-up capital. Though an institution has various options like issuing bonus shares from their annual profit or reserve, float rights shares or go for Further Public Issue, raising such a huge amount within two years may prove difficult for most of the commercial banks.
"The timeframe of two years to raise the paid-up capital by four times is inadequate. Most of the big banks, which have paid-up capital above Rs 4 billion, can raise it to Rs 8 billion within four to five years by issuing bonus or rights shares. However, those who are largely undercapitalized will have to raise it through merger and acquisition," former NRB Governor Tilak Rawal told Republica.
While state-owned Rastriya Banijya Bank Ltd and Agricultural Development Bank Ltd already have paid-up capital above Rs 8 billion, financial analysts say that other banks like Global IME Bank Ltd, Nabil Bank Ltd, Nepal Investment Bank Ltd, Prabhu Bank Ltd and Himalayan Bank Ltd, which have relatively higher paid-up capital, can meet the required minimum paid-up capital within two years by issuing bonus and rights shares.
Likewise, promoters of foreign joint venture banks like Everest Bank Ltd and Nepal SBI Bank Ltd are expected to inject further capital in the banks. "For the promoters of Nepal SBI Bank, the additional capital requirement is like peanuts. Likewise, Punjab National Bank might also be interested to add further capital. Or, they are in a comfortable position to increase capital by issuing bonus shares over three years including this year," Parshu Ram Kunwar, a banking expert, said. "Barring four or five private banks, remaining 18 banks have to go for merger or acquisition to meet the capital requirement."
He also pointed out the possibility of banks downgrading to a development bank. "Since some of the recently established banks do very few LC businesses, they might be interested to operate as a development bank which requires low capital base," added Kunwar.
However, the option is also far-fetched according to the five-year Financial Sector Development Strategy.
"A commercial bank will be interested to go for merger with another commercial bank rather than choose some development bank and finance company. Since commercial banks share similar language, work culture, staff, cash flow and working style, a commercial bank will seek another commercial bank as a partner to go for merger," opined Bhuvan Dahal, CEO of Sanima Bank Ltd.
Dahal said some banks will increase their capital on their own instead of going for merger and acquisition. "Merger and acquisition is not a cakewalk. There are complications during and after merger process," he said, adding that some bank will grow on their own as promoters will be willing to pour money to meet the new capital requirement. He also said NRN-promoted Sanima Bank will increase capital on its own.
Source : Republica
