In a major decision, the central bank has raised the capital requirement for commercial banks to Rs8 billion from the current Rs2 billion, while increasing it to Rs2.5 billion from Rs640 million for national level development bank. It has set national finance companies have to raise their paid-up capital to Rs800 million from the current Rs200 million.

The BFIs will have to meet the new requirement without reserves within the next two years as per the monetary policy 2015-16, according to NRB officials, confirming that the latest move was aimed at encouraging mergers and consolidation of the BFIs as well as issuing further public issue (FPO). The move is also expected to trigger growth in stock market, with investors making a rush to buy shares of the BFIs with hopes of rights shares. The NRB decision had an instant impact on the capital market as Nepal Stock Exchange (Nepse) index surged by 40.11 points with commercial banks leading the way on Thursday.  

But merger without right partner can be disastrous, according to bankers who also warn that such a temporary surge in the market may crash the market.

Stock analyst Rabindra Bhattarai said a momentary rise in stock market may bring some gains but the market could spiral once the investors cannot get desired return on their investments.

Having indirectly asked the BFIs to raise their

paid-up capital and forcing banks promoted by same groups of promoters to do so earlier, the central bank took a decisive step through the monetary policy for this fiscal year.

Presenting the monetary policy, Governor Nepal said that the measure to raise the paid-up capital was taken to strengthen the BFIs, make them competitive and bring financial stability.

“The objective of the measure is to enable a commercial bank to invest in a big infrastructure project on its own without consortium,” he said.

NRB Deputy Governor Maha Prasad Adhikari said the central bank’s move was also guided by an idea of bringing a mixed group of promoters to promote self-supervision. “This measure will also help lead consolidation process in the banking sector to a logical end,” he said.

However, bankers argue the measure would hurt central bank’s policy of separating the professional bankers and businessmen because the latter are ones with more money to invest. The bankers admit that increasing the capital as a necessity but harbour doubts if they could raise the paid up capital to the required levels within two years.

“The size of the capital itself is not too big, but the time allotted to achieve that is too short,” said Upendra Poudyal, president of Nepal Bankers’ Association. The BFIs had struggled to increase the capital to the current level despite being given more than five years to do so.

While the central bank measure may bring about mergers, Poudel warns that the banks will be at risks as they increase lending excessively in pursuit of

more profit.

Paid-up capital requirement

Types of institutions    Existing Capital    Requirement in 2 years

Commercial banks    Rs2 billion    Rs8 billion

Development banks

1 (National level)    Rs640million    Rs2.5 billion

2 (4-10 district-based)    Rs200-300m*    Rs 1.2 billion

3 (1-3 district-based)    Rs100-300m*    Rs500 million

Finance Companies

1 (National level)    Rs200-300m*    Rs 800m

2 (1-3 district-based)    Rs100-300m*    Rs 400m

* Financial institutions involved in leasing activities