Monetary policy Effect

By Rabindra Bhattarai

Nepal Rastra Bank (NRB) has made an amendment in the monetary policy relating to the commercial banks’ paid up capital requirement. A great slump in the stock market and investors pressure compelled the bank to reconsider it. This amendment has led to increase the Nepse index by more than 19 points in a single day. It has broken the history of 18.30 points increase in a single day recorded late April 2006.

The amended policy allows the banks to adjust the capital adjustment fund for only upto Rs. 200 million to reach Rs. 1 billion paid up requirement mid-July 2009. It was allowed upto 500 million before the latest amendment in the monetary policy.

Previously published monetary policy made the investors run to the stock exchange to liquidate their shares. Due to the oversupply of the shares, the Nepse index slumped by over 40 points dragging the market capitalisation down to Rs. 89 billion from Rs. 99 billion within two weeks of its announcement.

Paid-up Capital and Capital Adjustment Fund of Commercial Banks Bank Paid-up Capital Capital Adjustment Fund Paid-up Capital + Capital Adjustment Fund Standard Chartered Bank Nepal 37.46 7.49 44.95 Everest Bank 37.80 9.45 47.25 Nepal SBI Bank 43.18 12.83 56.1 Bank of Kathmandu 46.34 13.9 60.24 Nabil Bank 49.16 23.83 72.99 Siddhartha Bank 50.00 2.36 52.36 Nepal Investment Bank 58.77 11.78 70.55 NIC Bank 60.00 10.00 70.00 Laxmi Bank 60.98 - 60.98 Kumari Bank 62.50 - 62.50 NCC Bank 69.35 - 69.35 Lumbini Bank 70.00 - 70.00 Machhapuchhre Bank 71.50 - 71.50 Nepal Bangladesh Bank 71.98 - 71.98 Himalayan Bank 77.22 - 77.22 Source: Annual Reports and other publications of the banks, the stock exchange the central bank

The sole "culprit" was the relaxation granted to the commercial banks to increase the capital to Rs. 1 billion by mid-July 2009. The previous rule had required them to increase their paid-up capital to this level by issuing shares (new common stock, right shares or bonus shares). Now they were given an easier option. Provided that a bank had at least Rs. 500 million (before amendment) as paid-up capital, its capital requirement would be considered enough if another Rs. 500 million was there in its capital adjustment fund, thus making the total of Rs. 1 billion.

Because of the previous rule, the banks were retaining their net profit to add to the capital adjustment fund at the rate of 10 per cent of the paid-up capital every year. Out of this fund some banks were issuing bonus shares to increase the paid-up capital. And the investors were paying a high price to the stocks of such banks in an expectation to receive the bonus share (stock dividend) and right shares. This was the main reason for the share prices of such banks to rise steadily in the past one or two years. This attraction was removed by the new policy of the central bank.

The banks' decisions about how much dividend they would declare for the fiscal year that ended on mid-July 2006 and which option they would choose to meet the capital requirement were and are yet to come. But the investors were quick to rush to the exchange to sell their shares fearing that the banks would now rather retain the profit than distribute stock dividend. Thus there was over supply of shares in the market.

The fear was well-founded, but only from the short period point of view. Of course it is preferable for the banks to transfer the profit to the capital adjustment fund and leave it like that instead of capitalising on it through the issue of bonus shares to their existing shareholders. The issue of bonus share increases the cost to the bank and considering this, the banks were not likely to give stock dividend. This shattered the hope of those investors who bought the shares with the expectation that the banks would issue bonus shares and thus they (investors) would enjoy capital gain very soon.

However, for the long-term investors, the benefits were still there. The compulsory provision to maintain a paid capital of Rs. 500 million was and is not met yet by a number of banks, including the big banks (see the table) such as Standard Chartered Bank Nepal, Everest Bank, Bank of Kathmandu, Nepal SBI Bank and Nabil Bank. These banks must issue either bonus share or right share to meet the minimum paid-up capital requirement of Rs. 500 million. Similarly, the other banks which still don't have Rs. 1 billion capital (paid up plus capital adjustment fund) have to issue the right shares to meet the target. This would definitely provide benefit to the investors in the long run. But the investors were either not noticing this long term benefit or they prefer short term benefits only.

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