Reserve surplus of banks increases
KATHMANDU, DEC 8:
The reserve surplus with commercial banks has almost doubled with the surge in their profits. The reserve surplus with banks has gone up to Rs 19.95 billion in the first quarter of the current fiscal year from Rs 10.65 billion a year back.
The higher reserves with banks ensures solvency, as banks can access the reserve funds during contingent circumstances. If a situation arises whereby a large number of depositors withdraw substantial amounts of deposits, banks with higher retained earnings in the form of reserves can withstand the pressure better than the ones with smaller reserves.
“The higher the retained income with a company, the more solvent and stronger it is,” said managing director of Securities Research Center and Services Rabindra Bhattarai.
Nepal Rastra Bank (NRB) requires banks to put aside 20 per cent of their net profit as reserves. This time the reserves of the commercial banks has surged by a little over 41 per cent.
Reserves work as a safety net that helps avoid cases of insolvency. However, banks can keep aside any amount and decide to distribute dividends to investors from the remaining profit. Though increased reserves might shrink dividend distribution, long-term investors might find it desirable.
“If an investor is investing with expectations of lucrative dividends, then banks with the trend of holding less reserves will be desirable,” said share analyst Bhattarai.
“But for a long-term investor who wants to stick with a company for future benefits and appreciation of an investment, how much the company holds in reserve needs to considered as well, instead of only dividends,” he suggested.
Among the banks, Agriculture Development Bank has the highest reserve of Rs 5.1 billion, followed by Nepal Investment Bank with Rs 3.6 billion. At the other end, Nepal Bank and Rastriya Banijya Bank have negative reserves of Rs 4.4 billion and Rs 8.09 billion, respectively.
Moreover, a reserve is also a component of a bank’s capital according to NRB regulation. Commercial banks need to increase their paid up capital to Rs two billion by mid-July 2013. Almost all of the 11 banks that have a paid up capital of below Rs two billion have enough in the retained income to be able to fulfill the requirement.
“Based on regulation, the capital even without considering the proposed bonus shares of Standard Chartered Bank would be Rs 3.466 billion,” said Standard Chartered Bank Nepal’s head of Corporate Affairs Diwakar Poudel. The bank’s reserve surplus amounts to Rs 2.6 billion.
According to regulation, 80 per cent of the said capital shall be paid up capital and the remaining 20 per cent may be covered by any source that may be calculated as the core capital.
Source: THT
