Don’t bank on it

BANKS FACE A STEEP UPHILL TASK TO RAISE PAID UP CAPITAL BY FOUR FOLDS IN TWO YEARS

Abhilasha Rayamajhi

Kathmandu

Nepal Rastra Bank (NRB) has directed commercial banks to raise their paid- up capital four folds to Rs eight billion with the main objective to strengthen their capital for a sound and stable economy. The minimum paid-up capital that must be maintained by commercial banks until date is two billion. The Monetary Policy for the fiscal year 2015/16 requires that capital be increased four-folds within two years.

Development banks and finance companies must also in- crease their capital requirements as per the recent policy. National-level development banks will have to raise their paid-up capital to Rs 2.5 billion, while development banks that work in four to 10 districts must raise paid-up capital to Rs 1.2 billion. Likewise, development banks that have work in one to three districts will have to increase their capital base to Rs 400 million.

AIM TO CREATE FINANCIAL STABILITY

The Governor of NRB, Chiranjibi Nepal says, “This policy aims to create a stable financial sector. We envision banks and financial institutions (BFIs) with stronger capital base that can invest in big projects and infrastructure.” He further said that investors and stakeholders are content with this decision of the central bank and even Governors of other SAARC nations are positive regarding the policy. He elaborates that BFIs had mushroomed in the past. NRB introduced this policy to control the quantity BFIs in the country. He adds, “The consolidation of BFIs will also strengthen their public image and reputation. In addition there will not be liquidity risks and the management can be innovative.”

To raise the required capital, BFIs will need to go for merger and acquisitions and issuing of right shares or bonus shares. Since NRB has also introduced regulations to allow the entry of foreign banks in Nepal, this could also be an option to raise capital. Another option is the issue of Follow on Public Offer through which shares can be issued to the public.

DIFFICULT TASK AHEAD

“The explicit purpose of this policy is to strengthen the capital base of banks for financial stability. However, it is difficult for some banks to increase paid- up capital by four folds by mid July 2017,” says Upendra Poudyal, President of Nepal Banker’s Association. He adds, “There are limited options to raise capital. NRB’s direct indication is towards mergers and acquisitions.”

Anil Shah, CEO of Mega Bank Nepal Limited says, “In order to increase paid-up capital we strategise to use more than one method of raising capital in the coming two years.”

Poudyal says the Supervision Department of NRB has actively worked towards formulation and implementation of rules to create an effective and transparent banking system and he believes that NRB is a strong regulator. Similarly Shah shares that the central bank has been an effective regulator and BFIs have followed the rules set out by NRB and the banking sector has continuously improved. All BFIs have been supportive and responsive to the policies. How- ever, according to experts the success of this policy hugely depends on effectiveness mergers and acquisitions.

THE PROBLEM WITH MERGERS

According to Poudyal the major problem that comes along with mergers is human resource and value system integration. The process of a merger is complex and must be well-planned and strategised which requires time. The strategies, vision and culture of merging institutions must have common ground.

He shares, “A merger is like a marriage between two or more institutions. If it is not planned systematically it can affect the entire economy.” Every institution has its own value system and culture. It is often difficult for human resource to adapt and adjust to the integrated organisation structure. Operational risks and failure to address each customer’s need is also a setback in a merger.

“Each and every BFI has different products and approach towards its customer. An integrated bank does not ensure financial inclusion,” he says. He further says the prime focus of every financial institution is its customers. A policy cannot be successfully implemented if the customer is not satisfied. He elaborates, “For instance, a regional bank may be providing door-to-door facilities to its customers, which might be the need of customers in that area. Now, it is not possible for larger institutions to work on a local level.”

Besides, Shah also pointed out complexity in the integration of i n f o r m a t i o n t e c h n o l o g y platforms. Each institution has incorporated different software and systems which become difficult to amalgamate.

REQUIRES REVISION

Economist Bishwamber Pyakurel says, “The monetary policy to raise paid-up capital by four times must be reviewed and revised. Escalating the paid- up capital is not the solution to

reduce the present eco- nomic problems. The monetary policy cannot operate in isolation.” He explains that there must be linkage in the mone- tary policy and fiscal poli- cy for long-term healthy growth of the overall economy.

He further clarifies, “There must be a stable lending and borrowing environment in the finan- cial system of the country for collection of such huge amounts of wealth in a limited time frame.” He adds, “There are many bureaucratic hurdles that will hinder the process of raising capital.”

MERGERS CAN FAIL

Mergers and acquisitions encourage partner- ship, synergy and open doors to opportunities. However, according to re- search, the rate of failure of mergers is at least 50 per cent. Factors such as corporate culture, capacity of the management, strategies and resources must be considered before entering into a contract of merger according to experts. The evaluation of these factors requires adequate time and such decisions cannot be made forcefully.

The central bank aims to decrease the number of BFIs and enhance financial ability. By mid July 2017 it is expected that there will be 15-20 BFIs depending upon the success of these mergers and acquisitions.

STATUS OF PAID UP CAPITAL IN COMMERCIAL BANKS AS OF JULY 2015

List of commercial banks	Current Paid up	Capital Required
		Capital (in Billions)
Agriculture Development Bank Limited	9.86	-
Rastriya Banijya Bank Limited	8.58	-
Nepal Bank Limited	6.46	1.54
Global IME Bank Limited	5.01	2.99
Nepal Investment Bank Limited	4.77	3.23
Nabil Bank Limited	3.65	4.35
Himalayan Bank Limited	3.33	4.67
Prabhu Bank Limited	3.2	4.8
Prime Commercial Bank Limited	3.14	4.86
Nepal SBI Bank Limited	3.05	4.95
Civil Bank Limited	2.88	5.12
Machhapuchhre Bank Limited	2.77	5.23
NIC Asia Bank Limited	2.65	5.35
Mega Bank Nepal Limited	2.6	5.4
Sanima Bank Limited	2.55	5.45
Kumari Bank Limited	2.43	5.57
Nepal Bangladesh Bank Limited	2.43	5.57
NMB Bank Limited	2.4	5.6
Sunrise Bank Limited	2.39	5.61
Citizen Bank International Limited	2.37	5.63
Laxmi Bank Limited	2.33	5.67
Standard Chartered Bank Limited	2.24	5.76
Everest Bank Limited	2.13	5.87
Bank of Kathmandu	2.12	5.88
Century Commercial Bank Limited	2.12	5.88
Janata Bank Nepal Limited	2.06	5.94
Siddhartha Bank Limited	2.03	5.97
Lumbini Bank Limited	2	6
Grand Bank Nepal Limited	2	6
NCC Bank Limited	2	6

				Source: Compiled

 (This article was published in The Himalayan Times Perspectives on August 30, 2015)