KATHMANDU, July 23

Nepal Rastra Bank, the central monetary authority, has directed banks and financial institutions to raise minimum paid-up capital by up to four times to a whopping Rs 8 billion in the next two years.

The latest provision triggered a stock market rally on Thursday but dampened spirits of bankers, who are at a loss over how to mobilise such a big fund in a short period of time.

Unveiling Monetary Policy 2015-16, NRB Governor Chiranjibi Nepal said commercial banks would have to increase minimum paid-up capital from existing Rs 2 billion to Rs 8 billion by mid-July 2017.

He also said national-level development banks would have to raise minimum paid-up capital from Rs 640 million to Rs 2.5 billion by mid-July 2017, while national-level finance companies, including those operating in four to 10 districts, will have to jack up minimum paid-up capital from Rs 300 million to Rs 800 million.

Soon after these announcements were made, the benchmark stock index surged 40.11 points, or 4.16 per cent, to close at over 11-month high of 1003.38 points.

On Thursday’s stock market rally was led by commercial banks, whose share prices went up by an average of 6.85 per cent. Demand was also high for stocks of development banks and finance companies.

“It appears demand for shares of commercial banks and most of the development banks and finance companies will continue to go up in the coming days, as banks and financial institutions will have to float bonus and rights shares to expand capital base,” President of Stockbrokers’ Association of Nepal, Priya Raj Regmi, said.

Stock investors here prefer bonus and rights shares because these securities can be acquired at face value — or Rs 100 in most cases. In other words, if a share is trading at, say, Rs 3,000, investors need not fork out entire Rs 3,000 to acquire bonus and rights shares.

Instead, Rs 100 that a listed company is planning to extend as cash dividend can be converted into a share even if the market value of each of the stock stands at Rs 3,000. This is in the case of bonus shares.

In the case of rights shares, investors will be asked to pay Rs 100 to get hold of a stock in the company — meaning a share which is trading at, say, Rs 3,000 on the stock market can be acquired for Rs 100.

However, bonus shares can only be extended based on profit generated by listed companies. So, banks and financial institutions may not be able to rely on this mean to raise paid-up capital base by as much as four times. The other option to increase paid-up capital is through issuance of rights shares. But to acquire these shares investors will have to fork out money.

In other words, if a commercial bank, with a paid-up capital of Rs 2 billion, wishes to double its capital base by floating rights shares, investors will have to collectively raise another Rs 2 billion.

Currently, 23 commercial banks have paid-up capital of less than Rs 4 billion. This means shareholders of banks will have to look for hundreds of billions of rupees in the next two years for the purpose of recapitalisation. “But is this possible? And will investors be willing to inject such a huge amount at a time when return on equity of commercial banks has dropped below 20 per cent mark?” questioned President of Nepal Bankers’ Association Upendra Poudyal.

Bankers like Poudyal, however, say they are not against NRB’s decision to raise paid-up capital.

“We know higher capital requirement will only strengthen financial health of banks and financial institutions,” Poudyal said. “But we need a practical solution to deal with this issue.”

If investors of banks and financial institutions fail to fork out money for recapitalisation, the only option to meet the central bank’s requirement would be to go for merger.

“But there is no guarantee that all mergers will be successful,” Poudyal said. “And if problems emerge in merged units, risks may start building up in the institution, hitting profitability. These problems may even spill over to the banking sector, corroding the entire system.”

NRB’s former governor Yubaraj Khatiwada also said forceful merger would not be a desirable option to raise paid-up capital of banks and financial institutions.

“This is because mergers may not always be successful. And if mishap occurs, bankers will simply put the blame on the central bank,” Khatiwada said, adding, “NRB should have given more time to banks and financial institutions to raise paid-up capital.”

Poudyal also said a timeframe of five to 10 years should be extended to banks and financial institutions to raise paid-up capital depending on their existing capital base.