KATHMANDU, Aug 31: Nepal Rastra Bank (NRB) has tightened the noose on banks and financial institutions (BFIs), imposing strict controls for dividend approvals for their shareholders.
The central bank has issued a guideline for granting consent to publish financial statements and approve dividends for the annual general meetings of banks and financial institutions (BFIs). Under the new rule, BFIs can distribute dividends on unredeemable non-cumulative preference shares only from the profit of the current fiscal year, after adjusting their profit and loss account in the balance sheet. The central bank will also monitor whether the BFIs are complying with provisions related to the retained profit account and other funds that cannot be used for expenditure.
Cash dividends can now be declared or distributed only from amounts exceeding the minimum core capital and other capital funds, including the buffer and supervisory adjustments. For commercial banks and national-level development banks, dividend approval will be based on core capital after deducting the proposed cash dividend, in line with the Capital Adequacy Framework 2015. Similarly, infrastructure development banks must comply with the Capital Adequacy Framework 2018 when adjusting proposed cash dividends and supervisory requirements in their primary capital.
Revised interest rate corridor system introduced
As per the new rule, development banks, finance companies and microfinance institutions will have to increase their core capital base to distribute dividends. The NRB’s work procedure has asked these organizations to increase their primary capital by 0.5 percentage points.
All finance companies will have to comply with the Capital Adequacy Framework 2007. They have to maintain the primary capital at 6.5 percent, while the total capital fund must be 11 percent or more.
In case of the microfinance, they have to maintain a buffer of at least 0.5 percent of the prescribed core capital and at least one percent of the capital fund as required by the Integrated Directive. They should maintain a capital fund of nine percent or more while distributing the cash dividends. However, the rule is not applicable if the cash dividend is for tax purposes on issuance of bonus shares.
Furthermore, the NRB has decided to bar the BFIs from distributing cash dividends if they fail to maintain the monthly average interest rate difference as per the rule. The BFIs will face prohibition also in case they are unable to clear their outstanding dues on the loans pledged in the name of promoters having more than two percent stakes, even after five years of their operations.
If the paid-up capital of the entity resulting from the merger or acquisition is less than the total paid-up capital of the entities involved in the merger or acquisition, the difference in paid-up capital will have to be recorded in the capital reserve fund. Failure to comply will make the BFIs ineligible to distribute cash dividends to their shareholders.
