One regional level development bank chooses one province! Paid up capital increased to Rs 120 crores! Deadline of Ashadh, 2077 fixed!

Rewind a few years, the bullish NEPSE; optimism among investors and higher peaks every consecutive week, the Nepalese stock market was a hub for new and veteran domestic investors to earn an extra source of income. Nevertheless, companies’ massive earnings were not the major reasons behind the rising NEPSE index. The bullish movement was more or less due to capital increment plan adopted by financial institutions. Commercial Banks were given with a deadline by the central bank to meet the paid up capital of Rs 8 arba. These banks were competing with each other to attain the Rs 8 arba mark.

The central bank has set a new paid up capital range for regional level development banks. At present there are 15 listed tradable regional development banks which are operating in 1 – 3 districts geographical network. These banks are required to attain a paid up capital of Rs 120 crores. The present status of the paid up capital of these development banks are as follows:

Earlier, NRB had mandated all regional development bank operating in 1-3 district geographical territory to make Rs 50 crore paid up capital from Rs 10 crore capital. Now, most of the banks are in the range of Rs 50 crore paid up capital. These banks have to build their paid up capital by around Rs 70 crores more.

However, the motive of increasing the paid up capital of these regional level banks is not simply a stronger foundation or a bigger monetary base. The motive behind the capital increase is allocating these regional banks in their own provincial operation. Nepal’s new federal government system impacts the financial structure of the economy. Financial accessibility and inclusion fall under the top priorities of the government. Now that the country has been divided into seven provinces, it is of essence that each province has a delegated bank in the service of its residents.

The regional level banks are required to meet the paid up capital of Rs 120 crores and function in any one out of seven provinces of the country. Nonetheless, the regional level banks might not hold the capacity to escalate their paid up capital within a short span of time so, these banks can operate remaining within the currently operating districts of the country unless they meet the 120 crore mark. However, these banks cannot expand their business beyond the currently operating geographic territory.  

In addition to this, Regional level development banks which are operating their branches in more than one province should rather sell or close or shift these branches within the month of Asar, 2077 and operate all their business activities from a single provincial state. Similarly, even after these banks meet the paid up capital of Rs 120 crore, they will not be allowed to expand their business in the remaining districts of their chosen province if they still have branches in operation outside their chosen province. The banks will be allowed to expand their business in the remaining districts of the chosen province only after attaining the capital of Rs 120 crores and also limiting all the operational activities within a single territory.

Central bank has shown liberality towards those regional level development banks which have met the paid up capital of Rs 50 crores. Alternatively, regional level development banks that have met at least Rs 50 crores paid up capital can expand their operation activities to five joined districts in one province. The central bank also urges these regional level banks to prioritize the process of merger and acquisition over other alternatives while attaining the paid up capital. 

Photo source: NRB circular

The increased paid up capital of banks prior to this brought bearish market trend in NEPSE. Now, it’s time to witness the impact of the increased paid up capital of regional level development banks.

14 development banks yet to convene AGM; Post proposed M&A, the number to come down to 26 from 32