Rights share preferred tool to hike capital

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Kathmandu, October 6

Commercial banks resorted to issuance of rights share as the major component for increasing their paid-up capital — raising Rs 50.09 billion utilising the instrument.

To meet the regulatory capital requirement, 28 commercial banks in operation raised paid-up capital by Rs 128.24 billion, as Nepal Rastra Bank had raised the minimum paid-up capital requirement of class ‘A’ banks by 300 per cent from Rs two billion in mid-July 2015 to Rs eight billion in mid-July, 2017.

To meet the set requirement, banks issued bonus and rights shares to increase their capital. The central bank had allowed the banks to resort to any option to meet the paid-up capital requirement within two years and the central bank had strictly followed the deadline of mid-July, 2017.

Out of the total capital raised in between 2015 and 2017, commercial banks raised Rs 50.09 billion or 39.1 per cent from rights shares. This was followed by Rs 47.58 billion or 37.1 per cent from bonus shares. Likewise, mergers and acquisitions helped class ‘A’ institutions to generate Rs 26.69 billion, which was 20.8 per cent of the capital raised during the aforementioned period.

Similarly, further public offering contributed Rs 3.88 billion (three per cent) of the paid-up capital increment, according to NRB.

The central bank had encouraged consolidation (merger and acquisition) of banks and financial institutions to meet the paid-up capital requirement. But, commercial banks were concentrated in the issuance of rights shares, as per  Nara Bahadur Thapa, executive director of the Research Department of the central bank.

NRB’s move to raise the paid-up capital of financial institutions was aimed at ensuring stability of the financial sector.

“When its capital base is weak, a financial institution can collapse even from a small shock,” Thapa explained. “Considering the importance of a stable financial system, the government has spent Rs 3.5 billion from its own source and Rs 28.48 billion from the donors to keep the financial sector on the right track.”

NRB had raised the paid-up capital threshold of class ‘B’ and class ‘C’ financial institutions as well.

Contrary to class ‘A’ institutions, many development banks and finance companies resorted to the option of consolidation for paid-up capital increment.

Consequently, the number of development banks has come down to 33 from 76, and finance companies to 25 from 48, during the period given by the central bank for the paid-up capital increment.

NRB had raised paid-up capital requirement of national-level development banks from Rs 640 million to Rs 2.5 billion; for development banks operating in four to 10 districts, the requirement was hiked to Rs 1.2 billion from Rs 200 to 300 million earlier; and for development banks operating in one to three districts, the requirement was set at Rs 500 million from Rs 100 to 300 million earlier.

Likewise, the paid-up capital of national-level finance companies was increased to Rs 800 million from Rs 300 million. The requirement was set at Rs 400 million for finance companies serving one to three districts from Rs 100 to 300 million before.

Measures adopted by class ‘A’ banks

Instrument                                      Amount                  Share

Rights share                                     Rs 50.09bn              39.1%

Bonus share                                     Rs 47.58bn              37.1%

Merger/acquisition                          Rs 26.69bn              20.8%

Further public offering                    Rs 3.88bn                 3%

Total                                               Rs 128.24bn           100%

The post Rights share preferred tool to hike capital appeared first on The Himalayan Times.

Written by Nikki Hamal
This news first appeared on https://thehimalayantimes.com/business/rights-share-preferred-tool-to-hike-capital/ under the title “Rights share preferred tool to hike capital”. Bolchha Nepal is not responsible or affiliated towards the opinion expressed in this news article.