Central bank today directed the banks and financial institutions to hike paid up capital within next two years – to strengthen their balancesheet size – encouraging their further consolidation.
The commercial banks need to increase their paid-up capital by four fold to Rs 8 billion – from current Rs 2 billion – by the end of fiscal year 2016-17, said central bank governor Dr Chiranjivi Nepal unveiling the Monetary Policy for the current fiscal year 2015-16, here today.
Likewise, development banks should increase their paid-up capital upto Rs 2.5 billion and as per their working area, he said, adding that the minimum paid-up capital requirement for finance companies will be increased from Rs 200 million to between Rs 400 million to Rs 800 million.
Nepal said that the move to raise the paid-up capital was taken to strengthen the banks and financial institutions, make them competitive and bring financial stability. “The objective is to enable a commercial bank to invest in a big infrastructure project on its own without consortium,” he said.
The banks and financial institutions have no other options than to issue rights share, bonus share and further public issue apart from merger to increase their paid up capital. Earlier, central bank had asked the banks and financial institutions to go for merger, according to their convinence. “The move will help lead merger and acquisition – the buzzword that started a decade ago – or the consolidation process in the banking sector to a logical end,” said deputy governor Maha Prasad Adhikari. ” The central bank move will also encourage good governance,” he said, adding that the move is also aimed at bringing a mixed group of promoters to promote self-supervision.
The banks and financial institutions will have to meet the new capital requirement without reserves within the next two years according to the Monetary Policy 2015-16. “The move is aimed at encouraging mergers and consolidation apart from rights issue, bonus issue and issuing further public issue,” he added.
But the bankers said that the time period of two years – to increase paid up capital – is too short, though in the long run, they accept, they have no option than to increase paid up capital. “The merger is not a magic wand,” the bankers said, adding that mergers without right partners could be disastrous.
Likewise, some bankers also argued that the move will hurt central bank’s policy of separating the professional bankers and businessmen because the latter are ones with more money to invest. “The increament of paid up capital itself is not an issue, but the time frame is too short,” said president of Nepal Bankers’ Association (NBA) Upendra Poudyal.
However, the sudden but expected move of the central bank to hike paid up capital will fuel the share market.
According to share narket analyst Rabindra Bhattarai the bull run in the share market will not last long as the investors willnot get desired return on their investments in the next two years.
The first Monetary Policy of the incumbent governor Dr Chiranjivi Nepal has, however, not changed much of the existing provisions.
The expansionary Monetary Policy has kept cash reserve ratio (CRR) and statutory liquidity ratio (SLR) unchanged, despite speculation that both could be hiked to check inflation. The Policy has targeted to keep the inflation at 8.5 per cent, though it has not devised any monetary instrument to crack whip on inflation.
The Policy acknowledging the reconstruction drive – in the aftermath of devastating earthquake – and supporting the expansionary fiscal policy lacked plans to deal with price hike, though it has focused on macroeconomic stability and fuelling growth to six per cent.
The monetary policy has also failed to come up with measures to effectively deal with the issue of excess liquidity as the banks and financial institutions currently have over Rs 100 billion of excess liquidity that could increase inflationary pressure.
Last fiscal year, central bank had raised CRR — the portion of total deposits that banks and financial institutions must park at the central bank — for commercial banks to six per cent. Likewise, development banks have to maintain CRR of five per cent as in the past, while finance companies do not have to park more than four per cent of the total deposits at the central bank like in the previous year.
Likewise, SLR — the portion of deposit that has to be invested in government securities and assets like gold — has not been changed either. But policy rate, also popularly known as bank rate, has been revised downwards to seven per cent from eight per cent. The banks and financial institutions that approach the central bank — the lender of the last resort — for loans in dire situation will start getting funds at seven per cent interest rate from now onwards.
The policy has also introduced a new concept of Infrastructure Development Bank – following the budget – as a joint venture with a paid up capital of Rs 20 billion to fund big infrastructure projects.

Paid-up capital requirement
Institutions – existing capital – requirement in two years
Commercial banks – Rs 2 billion – Rs 8 billion

Development banks
• National level – Rs 640 million – Rs 2.5 billion
• 4 to 10 district-based – Rs 200-300 million – Rs 1.2 billion
• 1 to 3 district-based – Rs100-300 million – Rs500 million

Finance Companies
• National level – Rs200-300 million – Rs 800 million
• 1 to 3 district-based – Rs100-300 million – Rs 400 million

Monetary Policy 2015-16 Highlights
• Inflation target of 8.5 per cent
• Banks and financial institutions should bring chip-based debit and credit cards by mid-October
• Spread rate to be used for microfinance institutions also
• Special supervision of too-big-to-fail banks
• Foreign exchange facility of up to IRs 75,000 to be extended to settle payments of Indian transport companies
• Foreign exchange facility of up to $500 to be extended to Indian tourists visiting Mansarovar Kailash through Nepali tour operators
• CRR, SLR not changed
• Banks and financial institutions should invest certain portion of profit to train human resources and for corporate social responsibility (CSR)
• Banks and financial institutions can use local currency bonds to maintain statutory liquidity facility
• Liquidity Monitoring and Forecasting Framework to be revised
• Registration fees and other pre-operating expenses of foreign investors — who establish business with 100 per cent foreign investment — to be reckoned as investment
• Permission to be extended to establish national-level Infrastructure Development Bank with a minimum paid-up capital of Rs 20 billion
• Banks to be categorised as ‘Systematically Important’ depending on impact they could create on the entire financial system; separate standards to be created to regulate and monitor such institutions
• Prompt corrective action to be taken against banks and financial institutions that fail to meet liquidity requirements
• Deprived sector lending requirement raised by 0.5 percentage point
• Banks and financial institutions allowed to extend loan of up to Rs 1 million on security of land not linked with motorable road unlike current provision
• Special refinancing facility at one per cent interest to increase credit flow towards agriculture sector and small enterprises in districts with high poverty incidence

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