The central bank – last week – took prompt corrective action (PCA) against Grand Bank Nepal after its capital adequacy ratio (CAR) dropped to 4.07 per cent, much below the mandatory 10 per cent, due to massive loss.

The prompt corrective action is a type of penalty that the central bank imposes on commercial banks, development banks and finance companies, if they fail to maintain mandatory level of capital adequacy ratio.

Once a bank comes under PCA, it cannot open new branches, deposit mobilisation, new loan extension and distribute dividends.

The central bank has also barred the bank from purchasing and leasing out fixed assets, spokesperson of the central bank Manmohan Kumar Shrestha said. The bank cannot also distribute incentives, pay management fees and raise the retirement and other benefits, he said, adding that it has to get the central bank’s approval before introducing any new business activities related to deposits and credit.

The central bank has also suspected that Grand Bank had been hiding its real financial status by ever greening its real estate loans.

The CAR is the ratio of a bank’s capital to its risk. It can absorb a reasonable amount of loss and complies with statutory capital requirements. It is also known as capital fund to risk weighted average (RWA).

According to the unaudited statement of the Grand Bank for the last fiscal year 2013-14, its capital adequacy ratio fell to 4.07 per cent from a fiscal year ago’s 13.2 per cent.

Grand Bank has also posted loss of Rs 1.6 billion – mostly in real estate sector – in the last fiscal year. It had to provision Rs 1.93 billion for possible loan loss. The sharp rise in non-performing loans to 19.09 per cent has hit the bank’s capital bringing CAR below the required level, and forcing the central bank to impose PCA.

However, newly appointed chief executive of the bank Parshuram Kunwar Chhetri vowed to bring the bank back on the track within a year.

According to him, most of the bad loans will be recovered in the first quarter or the second quarter of the current fiscal year.

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