Nepal Rastra Bank’s (NRB) decision to hike the paid-up capital requirement for banks and financial institution (BFIs) is primarily aimed at strengthening them. However, we have also taken several other factors into consideration.

First of all, the existing requirement of Rs2 billion for commercial banks is very low compared to other South Asian nations. Also, we are implementing the Basel-III standards in our banking system, which seeks adequate capital to ensure financial stability.

The central bank gave the BFIs a chance to gradually boost their capital, but they didn’t show much interest in doing so. It took eight years to increase their capital to Rs2 billion although they were initially given a five-year period. There is a tendency of starting the process late and seeking time extensions after missing the deadline.

In this context, a decisive step was necessary so that the BFIs would be forced to start the process immediately. We first promoted wilful mergers, and now we are adopting forceful merger approach. As the average capital base of commercial banks stands at around Rs4.5 billion, there is a chance for a unification between two big banks, and a few mergers between banks and B and C class FIs.

We want to have 10-15 banks capable of investing singlehandedly in big infrastructure projects. Currently, even if all the commercial banks come together, they can fund just one 250MW hydropower project and this is insufficient for a country like Nepal where infrastructure deficit is high. We are preparing a “Financial Sector Development Strategy” which envisions having just commercial banks, not A, B, C and D class FIs.

Commercial banks, development banks and finance companies can all merge with each other to become a strong bank. There can be

specialised banking institutions such as micro-finance to be

regulated by a second-tier regulator under the NRB.

Another reason behind the capital hike decision is our preparations to open new licensing. The monetary policy has talked about reviewing the moratorium on new bank licences. We are going to increase the paid-up capital requirement for new banks to Rs10-15 billion. So before opening new licences, we want the existing banks to have comparable capital base. We can open the new licences next fiscal year if things go as planned.

We have allowed foreign banks to open branches here for wholesale banking only. We did so to safeguard domestic banks. We have to allow them to go for retail banking too. Before allowing the foreign banks to run full-fledged banking, we want to strengthen the domestic banks so that they can be competitive.

Nowadays, many Nepali banks are approaching the NRB, requesting it to ask the Reserve Bank of India to allow them to open branches in India. However, as per the Indian central bank’s provision, foreign banks with paid-up capital of

at least IRs5 billion (Rs8billion) can open branches there. So it is necessary for the Nepali banks to raise their paid-up capital at Rs8 billion

to become eligible to open branches in India.

Also, many bank promoters have expressed desire to quit banking, and the capital hike decision will encourage them to do so.

(As told to Prithvi Man Shrestha of The Kathmandu Post)

Rationale behind hike

-    Current capital base too small compared to other South Asian countries

-    Gradual increment not enough for the country’s financing needs

-    To remove the A, B, C, D categorisation under the financial sector development strategy

-    To open new licenses

-    To allow foreign banks to do retail

banking

-    To enable Nepali banks to open branches in India

NBA for more merger incentives

Nepal Bankers’ Association (NBA) on Sunday decided hold consultations with bank promoters before making public their opinion over the Nepal Rastra Bank’s decision to hike the paid-up capital requirement to Rs8 billion. They, however, reached a consensus that the central bank should offer additional incentives for mergers, as the capital hike decision is aimed at forcing the banks to go for merger. “We have also agreed that the central bank should allow us to count even the reserve as paid-up capital,” said NBA President Upendra Poudyal. (PR)