World Bank sees vulnerabilities in banking sector

The World Bank suspects vulnerabilities in the banking sector due to a rising trend in non-performing loans (NPLs) of commercial banks point.
The Nepal Development Update issued by the World Bank reads that the overall NPLs remained low – below the 5 per cent level – which seems stable but a rising trend in NPL point to some emerging vulnerabilities. According to the report, NPLs of 7 out of the 25 private commercial banks rose by 25 per cent, which means the banking sector that seems to be stable is not as stable as it looks to be.
Earlier too, the International Finance Corporation (IFC) had suspected banking sectors balance sheet. The balance sheets that looked clean are not as clean and they could have been doctored, the IFC had reported.
The increasing trend of NPLs follows a rise in the interest rates that are skyrocketing, which could deteriorate the quality of loans of banks. “The elevated lending rates have pushed some borrowers into default,” the report reads, adding that it is, however, not possible to identify the key drivers of deterioration in these seven banks since the central bank does not report NPL ratios by sectors.
NPLs are the loans of banks that are overdue by more than 90 days. The banks have to provision for the NPL amount, which will eat the profit of the bank.
However, bankers opine that there is no reason to worry with the current level of NPLs as it is the lowest in the South Asian region.
The World Bank report also concludes that all banks and financial institutions (BFIs) are well capitalised and meet the capital adequacy ratio (CAR) requirement – of 11 per cent – indicating that they have capacity or capital cushion to withstand any shock.
The central bank has also been time and again reminding banks not to be aggressive in lending.

Central bank mulls forced merger of microfinance institutions

The central bank is mulling to send microfinance institutions (MFIs) into forced merger to consolidate the number of class D financial institutions.
The wholesale borrowers lend the individuals without collateral for small enterprises. They can issue only up to 33 per cent of their investment portfolio by accepting collateral, according to the central bank. Likewise, the central bank has made the banks and financial institutions mandatory to lend 5 per cent of their total loan portfolio to the deprived sector but those which cannot lend directly due to lack of reach and capacity, lend the microfinance institutions to avoid the fine. Banks and financial institutions that fail to lend 5 per cent of their total loan portfolio to the deprived sector faces cash penalty, according to the central bank.
There are 91 microfinance companies currently operating in the country whereas some 18 are in line to receive licences. Though, he could not give any logic why the central bank wants to reduce the number of microfinance institutions, deputy governor of Nepal Rastra Bank (NRB) Chintamani Shiwakoti said that they have started to focus on the unification of microfinance companies. “The central bank has stopped issuing licences to the class D financial institutions – or popularly known as microfinance companies – in 2016 but only 11 companies have submitted letters of intent so far,” he said, adding that the central bank will issue a 30-day deadline to those that are in the process of receiving their permits. “There will be more than 100 microfinance institutions after all the companies that have received letters of intent start operation.”
He also attributed the size of market and sustainability of the microfinance companies for the forced merger. “As the market will be overcrowded with an excessive number of microfinance institutions soon, there will be unfair competition to survive, and reducing the number is the only remedy for the financial stability o,” Siwakoti added.
The central bank – to encourage mergers of microfinance companies – has also offered a number of incentives to potential partners through this year's monetary policy. The central bank has increased the maximum loan amount – like institutions can give from Rs 1 million to Rs 1.5 million – and the central bank will also extend the deadline for these institutions to maintain the minimum capital adequacy ratio (CAR).
Recently, the central bank has also capped microfinance lending at 20 per cent per annum including 2 per cent service charge. It has also ordered them to submit information about their borrowers to the Credit Information Bureau (CIB) to check possible multiple borrowing, which is one of the major challenges in the microfinance sector.

Central bank continue to run Nepal Bank for another six months

The central bank has decided to continue running Nepal Bank for another six months till the end of the current fiscal year.

The board meeting of the central bank today decided to continue its management team at the oldest bank of the country as some of its responsibility has yet to be completed like increasing capital adequacy ratio (CAR). The central bank has planned to increase CAR to over 10 per cent – that is mandatory regulatory requirement – by selling some Rs 2 billion worth assets. The CAR is used to protect depositors and promote the stability and efficiency of financial systems around the world.
Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. Thus, the higher the CAR, the stronger the financial institution is.

The central bank, had six months ago, also decided to continue take over until mid-January for the reforms including increase in paid up capital and selling of some of its assets. Though the bank has already increased its paid up capital, it is yet to sell assets, which has forced the central bank to continue its hold in the bank.

Nepal Bank – that has recently increased its paid up capital to over Rs 3.96 billion from earlier Rs 380 million only – is a listed commercial bank at the Nepal Stock Exchange (Nepse). The bank's shares have been traded at Rs 380 today. The public has 49.94 per cent shares in the bank. Today also the bank saw its bulk shares changing hands as Nirmal Pradhan, one of the big time investors, sold some 1.1 million units of shares at Rs 410 million, whereas Shiva Bikram Land and Industry promoted by entrepreneur Rabi Bhakta Shrestha bought the bulk units of shares.

Currently, a team led by the central bank director Maheshwor Lal Shrestha is handling the bank that was once under the financial sector reform programme, which most of the experts failed to reform the oldest financial institution of the country.

Non-detachable warrant to be instrumental to propel bond market

The non-existent bond market could get movement, if it is linked to stocks through non-detachable warrant.

"Stocks have been a key attraction in the domestic secondary market," said share market analyst Rabindra Bhattarai. "If listed companies can link stocks to bonds through non-detachable warrant, the bond market also could get movement," he said, adding that investors have to feel bonds to be as lucrative as stocks for a vibrant bond market.

The domestic bond market has remained non-existent since the beginning of trading at Nepal Stock Exchange (Nepse) some 19 years ago. The Nepse trading floor was opened on January 13, 1994.

The bond market could not see any trading at Nepse, though stocks have seen a rare bullish and bearish trend in the last two decades.

The Nepse currently has Rs 4.97 billion worth of bonds of some 13 institutions — 12 banks and one of Nepal Electricity Authority — listed at a face value of Rs 1,000 per unit but they are never traded at Nepse.

"The institutions should attach warrant — a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date — as a sweetener, allowing the issuer to pay lower interest rates while issuing bonds," Bhattarai added. "They can be used to enhance the yield of the bond, and make them more attractive to potential buyers."

Currently, banks that have tight liquidity — due to regulatory capital adequacy ratio (CAR) — have started issuing bonds to increase their lending capacity. However, the decreasing interest rates have made bonds less lucrative also to be sold let alone being traded at the secondary market.

"The corporate debentures should be attached with a sweetener like warrant," agreed a banker, who did not want to be named.

"But the regulatory authorities including Nepal Rastra Bank and Securities Board of Nepal including the Company Registrar must bring regulation that could make issue of non-detachable warrant possible," he said, adding that banks and financial institutions have started thinking of new instruments to make their bonds more lucrative as it is one of the best possible alternatives to help them expand their lending capacity.

"It could also help short-term fund mobilisation apart from increasing marketability of the bonds," the banker said, adding that the domestic banks did not issue warrants also — apart from regulation — due to their ability to manage capital to maintain CAR. "But recently most of them have started issuing bonds as they needed supplementary capital."

The capital market also might get depth as investors will get an alternative to shares, apart from companies, that will be able to mobilise capital at lower cost as it will be attractive even with less interest.

However, the warrant can be attached with corporate bonds only and not government bonds.

According to a report from Asian Development Bank (ADB), the bond market in Nepal is non-existent and a robust bond market that can match the financing requirements of huge infrastructure projects in Asia and the growing appetite for long-term assets among local pension and insurance companies is key.

What is warrant
KATHMANDU:In finance, a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date. Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. Both are discretionary and have expiration dates. The word warrant simply means to "endow with the right", which is only slightly different from the meaning of option. Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and make them more attractive to potential buyers. Warrants can also be used in private equity deals. Frequently, these warrants are detachable, and can be sold independently of the bond or stock.

In the case of warrants issued with preferred stocks, stockholders may need to detach and sell the warrant before they can receive dividend payments. Thus, it is sometimes beneficial to detach and sell a warrant as soon as possible so the investor can earn dividends.Warrants are actively traded in some financial markets such as Deutsche Börse and Hong Kong^. In Hong Kong Stock Exchange, warrants accounted for 11.7 per cent of the turnover in the first quarter of 2009, just second to the callable bull/bear contract. -- From Wikipedia, the free encyclopedia

Agricultural Development Bank to give dividend for the first time

Agricultural Development Bank Ltd (ADBL) is distributing dividends to shareholders for the first time in the last three years since its public offering.

The bank has announced distribution of 5.6 per cent cash dividend to ordinary shareholders. Likewise, it has also decided to distribute six per cent cash dividend to its preference stocks, subject to the approval from the central bank. Though the bank’s financial health has improved in the last half decade, its non-performing loan (NPL) is higher than six per cent though its Capital Adequacy Ratio (CAR) is at 18 per cent — highest among commercial banks. Moreover, ADBL’s second quarter financial report shows its cost of fund to be at 5.5 per cent, and its base rate is fixed at 12.35 per cent, the highest among the commercial banks.
Likewise, by the end of the second quarter this fiscal year, the bank had earned Rs 546 million. In the review period, it floated loans worth Rs 43.1 billion and collected deposits worth Rs 44.97 billion, and its net interest payment stood Rs 1.97 billion.
ADBL had earned Rs 1.86 billion as net profit in fiscal year 2011-12, making it the biggest profit earning bank in the last fiscal year. It is also the largest domestic bank in terms of paid up capital with a capital of Rs 9.47 billion. It is also the second largest company at the stock exchange with a market capitalisation exceeding Rs 6.4 billion.

The bank, that had issued shares to the public in April 2010, had not been able to distribute any dividend to shareholders despite earning profits due to its retained losses.

However, ADBL’s shares today were traded at Rs 211 per unit. There are 30.4 million units of ADBL shares listed at Nepse.

The majority stake of the bank — higher than 51 per cent — is owned by the government which is worth Rs 1.6 billion, while more than 228,000 public shareholders have a stake worth Rs 1.41 billion. The bank, that was established 46 years ago to promote agro lending, was upgraded to a commercial bank in 2006.

Banks can withstand high shocks

The central bank has claimed that banks have sound financial health.
"The stress test results of commercial banks as of mid-July 2012 on credit, liquidity and market shocks revealed their ability to withstand high shocks," according to Nepal Rastra Bank's (NRB) Financial Stability Report.
Among the 32 existing commercial banks, a standard credit shock would push capital below the regulatory minimum in 22 banks, and two commercial banks would be under-capitalised, it said, adding that sustained deposit withdrawals over five consecutive days would render five banks illiquid, and liquidity ratios of 17 banks would fall below 20 per cent in the event of sudden large withdrawals by institutional depositors. "Given the amount and nature of exposure, commercial banks are relatively less vulnerable to market shock."
While the resilience of the commercial banks to credit and market shocks have improved over time, the liquidity scenario analysis shows some potential risk, it added, though the soundness of financial institutions was maintained with adequate capital, liquidity and profitability buffers and improvement in asset quality.
The banking sector is adequately capitalised with the overall industry average capital ratio of 18.2 per cent. The Capital Adequacy Ratio (CAR) of class 'A', 'B' and 'C' institutions stood at 11.5 per cent, 20.5 per cent and 23.1 per cent, respectively, in mid-July 2012, which is well above the minimum regulatory requirement.
Likewise, the asset quality of commercial banks has shown some signs of improvement with the reduction of non-performing loan (NPL) ratio from 3.2 per cent in mid-July 2011 to 2.6 per cent in mid-July 2012. The average NPL ratio of banks and financial institutions stood at 6.1 per cent with finance companies having the highest ratio of 10.7 per cent followed by development banks with 4.9 per cent, according to the report.

Kuber, Himalaya finance declared crisis-ridden

The central bank has declared two finance companies — Himalaya Finance and Kuber Merchant and Finance —crisis-ridden after their financial status deteriorated due to negative capital adequacy ratio, and also to save the new depositors from being trapped.
They will now not be able to collect deposits and lend, except recover loans and repay depositors.
They were issued prompt corrective action earlier eight months ago giving them ample time to improve their financial health. However, Himalaya Finance failed to improve its deteriorating financial health, whereas Kuber Merchant and Finance could not make Nepal Rastra Bank satisfy with its explanation.

Both the Class C financial institutions have negative net worth and don’t have adequate liquidity. The central bank had been keeping them under its close surveillance since last eight months.

Himalaya Finance was found not even keeping records of its transactions. But eight months ago, its capital adequacy ratio (CAR) stood at 2.16 per cent less than the regulatory requirement.

The second quarterly report of 2011-12 of the Himalaya Finance revealed that it has a Rs 140 million paid-up capital but has Rs 520 million worth deposits and Rs 680 million worth credit. But it had incurred an operating loss of Rs 2.4 million till the second quarter of 2011-12 with heavy exposure in the real estate.

Likewise, Kuber Merchant and Finance has Rs 150 million paid-up capital with Rs 801 million deposits and Rs 893 million credits – as of the last fiscal year end – with heavy exposure to real estate.

One of the directors of Kuber Merchant and Finance Sudhir Basnet has been himself the lenders, who had managed to get loan from his own finance company pushing it to an edge.