NRB tightens screws on BFIs over capital

BANKS and financial institutions (BFIs) have to fulfill the paid-up capital requirement through accumulation of the fund paid by the shareholders within a year. While extending the deadline for fulfilling the paid-up capital requirement by one year after it expired at the end last fiscal year, the central bank on Sunday issued a new circular announcing the scrapping of the existing provision of the fulfilling the paid-up capital through reserves. The unified directive 2013 has made the provision that the BFIs could increase their paid-up capital requirement with 80 percent paidup and 20 percent reserves. With the new provision, the BFIs failing to meet cent percent paid-up capital should either issue rights shares or bonus shares or go for merger. As of the last fiscal year, eight commercial banks and several development banks and finance companies have not fulfilled the paid-up capital in cent percent paid-up version. Although the commercial banks have been fulfilling the requirement through reserves, development banks and finance companies are struggling to fulfill the requirement even through reserve. “The move was taken to encourage the BFIs to go for merger,” said a senior NRB official. “In the current circumstances, the BFIs will prefer merger instead of issuing rights and bonus shares.” The official said that it would also affect the share market with investors willing to invest on the shares of particular commercial banks with hope that they could issue rights or bonus shares. Under the current licensing policy, the commercial banks are required to maintain a paid-up capital of Rs 2 billion, while national-level development banks have to maintain it at Rs 640 million. For the development banks with the operational license in 4-10 districts will require Rs 200 million, and those authorised to operation in 1-3 districts need Rs 100 million. As far as the finance companies are concerned, national-level finance companies have to maintain a paid-up capital of Rs 200 million, while such companies with license to operate in 1-3 districts should maintain a paid-capital at Rs 100 million. The central bank has asked BFIs to submit their capital plans within mid-October. A former NRB official said that the central bank’s move appeared to be guided by not allowing the BFIs to distribute cash dividends at a time a majority of banks have been announcing huge rise in profits. “It is also the principle of Basel guidelines that the capital should be strengthened whenever the banks log good profits,” he said.