August 13: Nepal Rastra Bank (NRB) has started to reject the proposals of banks and financial institutions (BFIs) to issue rights shares. NRB has adopted a strategy of increasing the capital of BFIs only through mergers and acquisitions. The central bank informed that it is discouraging the issuance of rights shares and promoting mergers instead.
Nepal Rastra Bank’s strategy of restricting the issuance of rights shares has compelled banks and financial institutions to opt for merger or acquisition in order to increase their capital. NRB Spokesperson Gunakar Batta said that the central bank’s next move is to reduce the number of banks down to a certain level.
“The capital base needs to be strengthened through merger or acquisition. Nepal Rastra Bank is prioritizing mergers over any other methods in order to reduce the number of banks,” he told New Business Age.
The Banks and Financial Institutions Regulation Department of NRB informed that the central bank has rejected proposals of issuance of rights shares of some institutions including Tinau, Mission and Shine Resunga development banks. Shine Resunga Development Bank that has a paid-up capital of Rs 3.1 Billion, had sought permission from the central bank to issue rights shares at a 4:1 ratio, as per the decision of the 11th annual general meeting of the bank. The proposal has however been rejected.
An official from the regulations department of Nepal Rastra Bank has said that it was inappropriate for the banks to ask for an approval for issuing their rights shares from the central bank after endorsing it by the AGM.
“We are aiming to promote mergers and acquisitions. Issuing of rights shares is not an option for increasing the capital to strengthen the banks,” a high-level source said.
The central bank has been rejecting proposals to issue rights shares but has not prohibited the issuance of rights shares. It hasn’t issued any circular to the commercial banks, development banks and micro finance companies to stop issuing rights shares. However, micro-finance companies will be given specific instructions prohibiting them from issuing rights shares.
The latest move of the central bank is in line with the monetary policy of the current fiscal year which encourages mergers and acquisition more than issuance of rights shares.
Bankers believe that the issuance of rights shares should be tightened instead of a complete ban.
Bankers pointed that issuing of rights shares unnecessarily shouldn’t be approved but certain criteria need to be created to approve the issuance of necessary rights shares if required.
Basanta Raj Lamsal, the chairman of Nepal Microfinance Bankers’ Association, said that it would be more appropriate to grow the capital through both rights shares and mergers. Chairman Lamsal further informed that he is planning to request Rastra Bank to make necessary arrangements and criteria required to enable financial institutions to issue their rights shares.
