The minimum paid-up capital requirement for commercial banks in Nepal is the lowest in South Asia — even lower than in Bhutan, a recent study conducted by Nepal Rastra Bank (NRB), the banking sector regulator, shows.
Commercial banks here are required to maintain a minimum paid-up capital of $21.05 million, whereas even a country like Bhutan has introduced a provision where commercial banks need to have a capital base of $50 million.
The highest paid-up capital requirement in South Asia is in Pakistan, where commercial banks need to hold minimum paid-up capital of $99.7 million, shows the NRB report titled ‘Capital Hike for Banks and Financial Institutions’.
The report has been launched at a time when NRB has directed banks and financial institutions to raise paid-up capital by up to eight fold.
Issuing the Monetary Policy on July 23, NRB had instructed commercial banks to increase minimum paid-up capital from existing Rs two billion to Rs eight billion within mid-July 2017.
Also, national-level development banks have been told to raise minimum paid-up capital from Rs 640 million to Rs 2.5 billion within that period, while development banks operating in four-10 districts and one-three districts, excluding those in Kathmandu Valley, have been asked to jack up minimum paid-up capital from Rs 200-300 million and Rs 100-300 million, respectively, to Rs 1.2 billion and Rs 500 million.
Likewise, national-level finance companies, including those operating in four-10 districts, need to raise minimum paid-up capital from Rs 300 million to Rs 800 million, while finance companies operating in one-three districts, excluding those in Kathmandu Valley, have to increase paid-up capital from Rs 100-300 million to Rs 400 million within mid-July 2017.
NRB, in the latest report, has said the new capital structure would enhance shock absorbing capacity of BFIs, help them to consolidate their positions in the market and let them expand branches in foreign countries.
The report says if all BFIs decide to inject fresh capital to meet the new paid-up capital requirement, they will have to mobilise Rs 228.7 billion within mid-July 2017.
A total of 30 commercial banks alone will have to mobilise Rs 143.10 billion within that period. But if all commercial banks decide to go for merger, then the number of these class ‘A’ financial institutions will come down to 12, adds the report.
The report further says the recapitalisation plan will not hit profits of commercial banks because commercial banks continued generating higher profits after recapitalisation plan was introduced in 2006.
In between mid-July 2007 and mid-July 2014, average annual net profit of commercial banks stood at Rs 15.50 billion, while return on equity stood at 32 per cent. In the fiscal year ended mid-July 2014 alone, average annual net profit of commercial banks stood at Rs 21.40 billion, says the report.
However, the report acknowledges that some of the weaker institutions may face problems while rolling out recapitalisation plan and report undersubscription of rights shares, while others may focus more on off-balance sheet transactions to meet the new paid-up capital requirement.
A version of this article appears in print on October 05, 2015 of The Himalayan Times.