Increasing their capital has become imperative for banks to expand their loan portfolio and to appease shareholders with cash dividends. As the average capital adequacy ratio of commercial banks is at 11.3 per cent, there is less space for the entire banking sector to expand their lending even to lucrative projects that are waiting for finance. Commercial banks are required to maintain a minimum of 10 per cent capital adequacy ratio to its total risk weighted assets according to Nepal Rastra Bank (NRB)’s regulation. Moreover, from now on, a bank can distribute cash dividend only if it has 11 per cent capital adequacy — including one percentage point of buffer capital. “The current capital adequacy of banks might not be enough to declare cash dividend in the coming fiscal year even if the banks earn profits,” said share analyst Rabindra Bhattarai. Since capital adequacy ratio measures the amount of a bank’s capital in relation to the amount of its risk weighted credit exposures, the amount of capital with banks limit their capacity to float loans which are considered risk weighted assets. A lower CAR not only compromises a bank’s solvency in case of emergencies but it also constricts its capacity to float loans. “Banks can capitalise the profit earned by distributing bonus shares while maintaining capital adequacy and increase capital at the same time,” added Bhattarai. Moreover, many banks have sought issuing debentures as the best possible way to increase capital, in the short run, to expand lending. So far into the fiscal year, six commercial banks have issued dividends worth Rs 3.4 billion — the amount is higher than the total primary issues held since the fiscal year began. The debentures issued are included under Tier II capital — supplementary capital — of the issuing bank that increases the bank’s capacity to float more loans without increasing capital. NRB has signalled that it will be introducing a provision to increase paid up capital requirement of financial institutions, including commercial banks, development banks, finance companies and microfinance development banks. The banks have all increased their paid up capital to the mandatory Rs two billion, except for Nepal Bank and Century Commercial Bank. “With more capital, banks become stronger and stable and they can absorb a higher level of unexpected losses,” pointed out spokesperson for NRB Bhaskar Mani Gyanwali, without denying or agreeing that the central bank is planning to increase the capital requirement of banks. “They can issue rights shares and bonus shares to existing shareholders or opt for mergers to increase capital,” he added. “Existing shareholders might not be willing or may not have the capacity to increase investment through the purchase of rights shares,” pointed out a banker, emphasising that gradual increment is better than an abrupt one. “Though a merger seems the best possible alternative, the experience and performance of merged financial institutions is not encouraging for financial institutions to opt for merger,” informed a chief executive officer of a bank.
Posted on: Sun, 30 Jun 2013 14:04:56 +0000
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