Nepal’s banks and financial institutions (BFIs) will have to come up with a combined Rs228 billion in the next two years to fulfil the central bank’s directive to boost their paid-up capital. Nepal Rastra Bank (NRB) has jacked up the capital requirement four-fold, setting off a scramble in the financial community to find the necessary cash. Currently, their total paid-up capital amounts to Rs139.7 billion.

As per the central bank’s directive, commercial banks have to hike their paid-up capital to Rs8 billion from the current Rs2 billion, national-level development banks have to raise it to Rs2.5 billion from the current Rs640 million, and national-level finance companies have to ramp up their capital to Rs800 million from the current Rs200 million.  

This means that in the next two years, the country’s 30 commercial banks will require a total capital injection of Rs143.1 billion while the 79 development banks will have to find an additional capital of Rs65.5 billion. Likewise, the 50 finance companies will have to add Rs20.1 billion, said NRB in a position note on the capital hike for BFIs.

If all the commercial banks opt to go for a merger to fulfil the capital requirement, their number will be squeezed down to 12 new entities.

Other options floated by NRB are issuance premium ordinary shares, bonus shares, rights shares and preference shares, acquisition and joint venture with foreign BFIs. As directed by NRB, almost all the BFIs have submitted their capital hike plan with some choosing to hike their capital through profit capitalization and rights shares and mergers.

However, given the time limit of two years, central bank officials believe that many newer banks will go for mergers while the older ones and those who have initiated large-scale mergers could go for issuance of rights and bonus shares.

“We expect many BFIs to go for mergers to hike their capital,” said Nara Bahadur Thapa, chief of research department at NRB. Presently, out of the 27 private sector banks, two banks have a capital of more than Rs4 billion and five banks have a capital of Rs3 to Rs4 billion. The remaining 20 banks have a capital of less than Rs3 billion.

In a response to complaints that the central bank has given very little time to put together the money, NRB has presented examples from Malawi, Nigeria and Zambia where banks were given a deadline ranging from 15-18 months to hike their capital by many more times than in Nepal.

The central bank said that the hike in the paid-up capital was necessary as BFIs would not be able to provide loans as per their increased deposits until their paid-up capital swelled because this would result in excess liquidity.

While the country’s gross domestic product (GDP) is expected to grow by 4.35 times by fiscal 2016-17 from the level in fiscal 2005-06 when BFIs had been told to hike their paid-up capital to the current level, the capital requirement has not changed till now. “It is necessary to hike the capital of BFIs to keep pace with the growth in the country’s GDP,” said the central bank.

Another reason that NRB has advanced is that BFIs will be limited in their ability to increase lending until they hike their capital. “If they have less capital, they cannot maintain adequate capital against risk weighted assets,” said Thapa. “One of the reasons behind the continued excess liquidity with BFIs in recent years is their low capital base.”

The hike in capital is expected to strengthen the lending capacity of BFIs and help to enhance financial stability, according to NRB. They may, however, go for off-balance sheet transactions to increase profits in order to hike the capital which may increase risks to the financial system.

The central bank said that this would also affect the share market. “As the supply of shares rise in the stock market, it will generally lead to a drop in share prices,” NRB said in the position note. “However, prices may go up in the initial days as demand for shares rises due to the lure of bonus and rights shares.”

New capital requirements

BFI Type                        Existing capital     New Requirement    Funds needed

Commercial Banks         Rs96.9b                     Rs240b                 Rs143.1b

Development Banks       Rs26.9b                     Rs92.4b                Rs65.5b

Finance Companies       Rs15.9b                     Rs36b                   Rs20.1b

Total                                   Rs139.7b                   Rs368.4b             Rs228.7b    

Source: Nepal Rastra Bank