The Nepal Rastra Bank (NRB), the banking sector regulator, has removed Kuber Merchant Finance and Lalitpur Finance from the list of ‘problematic’ financial institutions after the two reported improvement in their financial health.

The financial health of the two finance companies had gotten better after new investors injected fresh capital, according to NRB Spokesperson Narayan Prasad Paudel. With this, the two institutions were able to meet the minimum regulatory capital adequacy ratio of 11 percent and raise paid-up capital to the level stipulated by the regulator.

Earlier, the NRB has said troubled financial institutions can be removed from the list of problematic institutions if they maintain 25 percent of the new paid-up capital requirement and meet the capital adequacy ratio. The NRB had said troubled institutions can meet 25 percent of the new paid-up capital requirement by factoring in call-in-advance—the money contributed by shareholders for the purpose of injecting fresh capital in the financial institution.

As per this provision, the two institutions have maintained 25 percent of the new paid-up capital requirement, Paudel said. The new minimum paid-up capital requirement for national level finance companies and those operating in four to 10 districts is Rs800 million. The two institutions have now been given a timeline of two years to meet the minimum paid-up capital requirement of Rs800 million. The NRB has already directed the two institutions to submit recapitalisation plan to meet the new minimum regulatory paid-up capital requirement within 35 days. Unless they meet the new minimum regulatory paid-up capital requirement, they will be barred from extending over 10 percent of the core capital as credit to single borrower, the NRB has said.

The two institutions have also been directed to gradually reduce the volume of bad loans, and strengthen governance, and internal control and risk management systems. Lalitpur Finance, in the meantime, has been directed to initiate action against people who pushed the company to the verge of collapse. The finance company has been instructed to submit a progress report on this within two months.

The financial health of the two companies had deteriorated after disbursing loans in a haphazard manner and failing to maintain financial discipline. Following this, the NRB declared Kuber Merchant Finance as ‘problematic’ in January 2013, while Lalitpur Finance was labelled as ‘problematic’ in March 2015.

Previously, the NRB had removed Arun Finance and General Finance from the list of ‘problematic’ institutions. Arun Finance was declared ‘problematic’ in January 2015 and removed from the list in January 2017. General Finance was declared ‘problematic’ in May 2013 and removed from the list in December 2016.

Currently, seven development banks and finance companies are categorised as ‘problematic’ financial institutions. They are: Corporate Development Bank, Nepal Share Markets and Finance, Crystal Finance, Capital Merchant Banking and Finance, World Merchant Banking and Finance, Narayani Development Bank and Nepal Finance.

Earlier, the NRB had said Corporate Development Bank would also be removed from the list of ‘problematic’ financial institutions soon, as it has met the minimum regulatory capital adequacy ratio of 11 percent and its financial health has improved significantly. “We will take a decision in this regard soon,” Paudel said.