Money
NRB tells BFIs not to issue cash dividends
Nepal Rastra Bank (NRB) has told banks and financial institutions (BFIs) not to distribute cash dividends to their shareholders from the profits of fiscal 2014-15Nepal Rastra Bank (NRB) has told banks and financial institutions (BFIs) not to distribute cash dividends to their shareholders from the profits of fiscal 2014-15 since they will need the money to boost their paid-up capital as required by a recent central bank directive. However, they can make provision for government taxes.
BFIs have been ordered to increase their minimum paid-up capital fourfold within two years. The central bank has hiked the minimum level to Rs8 billion from the current Rs2 billion for banks, to Rs2.5 billion from Rs640 million for national level development banks and to Rs800 million from Rs200 million for national level finance companies.
Likewise, a number of district-level development banks and finance companies will also have to ramp up their paid-up capital.
Publishing a working procedure, the central bank said that BFIs should refrain from distributing cash dividends and instead issue bonus shares as they will need to bring up their paid-up capital to the new level by mid-July 2017.
Meanwhile, promoter shareholders holding shares amounting to more than 15 percent of the paid-up capital in a bank or financial institution or holding more than 1 percent of the stock in other BFIs cannot get cash dividends or bonus shares until they bring down their share to below that level. However, this provision will not apply to institutions like the Employees Provident Fund, Citizen Investment Trust and Rastriya Beema Sansthan where the government owns more than 50 percent of the shares, according to NRB. They can hold more than 25 percent of the promoter shares by taking the central bank’s approval.
Meanwhile, BFIs with cross-holding shares in another BFI cannot distribute cash dividends or bonus shares to their shareholders until cross-holding is removed. Likewise, financial institutions which have been penalized under prompt corrective action (PCA) between the end of the fiscal year and their annual general meeting will not be permitted to distribute cash or stock dividends if the penalty has not been served.
BFIs failing to meet the liquidity and capital adequacy ratio requirements face PCA. Commercial banks are required to maintain 20 percent liquidity and 10 capital adequacy ratio while the requirement for financial institutions is 20 percent liquidity and 11 percent capital adequacy ratio. The stipulated capital adequacy ratio for micro finance institutions is 9 percent.
Meanwhile, those failing to maintain a buffer capital of 1 percent on top of the required capital adequacy ratio have been barred from issuing bonus shares or cash dividends, according to NRB.
The central bank has also said that BFIs have to maintain a cent percent loan loss provisioning for loans issued and deposits made in BFIs which have been declared crisis-ridden. Likewise, they have to maintain cent percent provisioning for loans that have turned problematic and whose collateral has been frozen.