After the announcement of annual budget for the year 2015/16, Nepal Rastra Bank (NRB) introduced an increase in paid up capital in their monetary policy for the fiscal year. Through the hike in paid up capital by four times to Rs. 8 billion within two years time span for commercial banks, the central bank aims to make banks and financial institutions stronger with large capital base. Currently, the capital base for commercial banks in Nepal is relatively low as compared to several banks operating in South Asia.
In Nepal, there are currently 195 banks and financial institutions which comprise of 30 “A” class banks, 79 “B” class banks and 50 “C” class banks. Among the “A” class commercial banks, Rastriya Banijya Bank Ltd meets the current capital requirement with paid up at Rs. 8.59 billion. Similarly, Agricultural Development Bank Ltd also has a paid up capital of Rs. 9.64 billion.
Moreover, there has been an increase in paid up capital for other financial institutions as well. The national level development banks must increase paid up capital to Rs. 2.5 billion and other development banks operating in 4 to 10 districts must maintain to Rs. 1.2 billion. For development banks operating only in 1 to 3 districts, the capital must be at Rs. 400 million.
This move of the central bank has overtaken all other reforms and policies brought in by the monetary policy of the year. The increase in paid up capital by four times for commercial banks is focused on stabilizing their financial condition and providing competitive edge. The low capital base hinders the ability of banks to provide large amount of loans. The new policy will enable them to promote large lending independently.
Additionally, the core objective as stated by NRB is to make banks as well as financial institutions able to sustain small market shocks and fluctuations and to finance large scale projects. However, NRB does plan to reduce the growing number of financial institutions in the country. The central bank aspires to develop few banks with large capital base which will uplift banks to an international standard. As the banks have large capital and are small in number, they might not reach throughout the country. This will provide a potential platform for the development of microfinance in rural areas that will work under NRB.
This policy has also resulted after the international pressure from agencies such as International Monetary Fund. Nepal requires large funding capacity from banks to increase the number of development projects. The International Monetary Fund (IMF) has forced the central bank to reduce the growing number of banks and financial institutions in the nation.
The central bank has also allowed the operation of foreign banks only as wholesale banking. But in the long run, foreign banks might enter the market for full fledged banking. So, NRB is preparing existing banks to be competitive and survive alongside international competitions. The existing banks of Nepal have been willing to operate in India but the Indian central bank’s policy requires the paid up capital of foreign banks to be IRs. 5 billion to open a branch in India.
Furthermore, NRB plans to reduce the number of banks and financial institutions through the increase in capital base. The few remaining commercial banks after mergers will make the financial market even stronger and stable.
The issue of change in paid up capital has been discussed among several experts and personnel from the sector. The time frame of two years will not be sufficient to implement such a large increase. The banks and financial institutions must undergo merger and acquisition, issue of rights and bonus shares, or promote Further Public Offer to increase the capital. The banks can also issue bonus shares which will transfer the surplus and reserve to the capital. Moreover, Further Public Offer can be used to increase the equity. However, all the banks and financial institutions cannot be funded by public investment at the same time.
One of the viable options to increase the capital is through mergers and acquisitions. But, for some banks such as development banks, even a merger cannot be sufficient to meet the requirement. The mergers can take place between two large commercial banks or even between bank and other class of financial institutions.
The deadline for submission of bank’s plan regarding raising capital has passed. The banks have assured the central bank to enter into mergers with other commercial banks, but the problem of promoter’s loan has been noticed that either needs to be cleared or shifted to other bank. The central bank is willing to supply additional time to shift the loans.
The banks and financial institutions are questioning the time frame provided to implement the capital increment. The objective of NRB to reduce the banks and financial institutions cannot be fulfilled as merger is not a viable option in the short time frame between two or more institutions. It is significant for NRB to negotiate with banks regarding the strategies to be adopted rather than imposing it on the banks.
The monetary policy had brought immediate impact on the financial market and trading. The stock market registered high rise. The market demand for shares is also escalating due to the possibility of mergers and acquisitions, new capital injection and issuance of Further Public Offer and right shares. The banks and financial institutions have provided positive outlook towards new investment being brought in the banks.
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