June 5: Banks that have been aggressively expanding their business by increasing their capital through mergers and acquisitions have started to experience pressure on their primary capital.

As the capital adequacy ratio of commercial banks started to become less than the limit set by the Nepal Rastra Bank (NRB), they have started to demand the issuance of rights shares or bonds to increase their capital so that they can be counted as primary capital.

According to Nepal Rastra Bank, the average capital adequacy ratio of commercial banks in Nepal as of mid-April was 10.16 percent. In mid-July last year, this ratio was 10.73 percent.

Banks must maintain a capital adequacy ratio of at least 8.5 percent. If the capital adequacy ratio is less than specified, the central bank will not allow such banks to distribute dividends.

Banks have not been able to expand their business even though the liquidity has eased because of the pressure on the capital adequacy ratio while disbursing loans.

In mid-April, the capital adequacy ratio of 11 banks was in single digit. Among them, Prabhu Bank had the lowest at 8.61 percent. Similarly, Siddharth, NIC Asia and Machhapuchche banks also had a capital adequacy ratio of less than 9 percent.

Laxmi Bank and Sunrise Bank, which are under pressure in terms of capital, have already entered into an agreement for merger and have started the process.

Banker Sunil KC said that due to the pressure of capital adequacy ratio on some banks, they have requested the Nepal Rastra Bank through the Nepal Bankers Association for the option of issuing rights share or bonds. "The capital adequacy ratio of all banks is not in a difficult situation though," he said.

By mid-May of the current fiscal year, commercial banks have extended loans of only Rs 123.77 billion while collecting deposits of Rs 299 billion. The average credit-deposit ratio (CD ratio) of banks has fallen to 86.34 percent. However, banks have not extended loans due to the pressure of capital.

Ashoke Rana, Chief Executive Officer of Himalayan Bank, said that banks with low primary capital have been asked to make arrangements to issue rights shares. "We have requested banks that are under pressure due to primary capital to issue bonds that are counted as capital," he said, "We are hopeful that this will be addressed through the upcoming monetary policy."

The central bank has raised the risk weight of personal overdraft and vehicle purchase loans as well as real estate and share mortgage loans to 150 percent and the risk weight of Trust Receipt (TR) loans to 120 percent. Due to this, the capital adequacy ratio has narrowed down as the risk in the loans of banks have increased.