Capital adequacy ratio (CAR) - Factor to consider before investing for Dividend expectations.

With the capital adequacy ratio (CAR) of the commercial banks taking a dive in last fiscal year 2070/71, they are bound to distribute the bonus shares to the shareholders instead of prioritizing the cash return as the dividends to their shareholders.

The average CAR of the commercial banks has come down to 11.32 percent by the end of the last fiscal year 2070/71 from 12.22 percent in the previous fiscal year 2069/70. The CAR level of the banks that they have maintained in the last year is slightly above the central regulatory bank’s prescribed level.

According to NRB requirement, commercial banks have to maintain at least 10 percent of CAR while they should have additional one percent of buffer capital.

CAR is a measure of a bank's financial strength expressed by the ratio of its capital (net worth and subordinated debt) to its risk-weighted credit exposure (loans). A bank with a higher capital adequacy is considered safer because if its loans go bad, it can make up for it from its net worth.

Though the liquidity surplus is gripping the banking and financial institutions, the relatively lower level of the CAR will inhibit their capacity to finance big projects or extend a higher amount of loans.
Nepal Rastra Bank (NRB) has been urging the commercial banks to maintain enough capital base to increase their capacity to lending.

“We have been expecting around 18 percent deposit growth in the upcoming fiscal year which means around Rs 250 arba will come as deposit in the banking system in the coming year which means more fund will be available with you for the investment. So far the capital adequacy ratio issue is related, you have to be responsible for this. You are just hitting around the bush. You rarely talk about doing things that come as part of your liabilities,” Nepal Rastra Bank governor Dr Yuba Raj Khatiwada told a group of bank executives gathered at recent interaction on the Monetary Policy which was jointly by IBN Media and Research and Nepal Bankers Association (NBA).

“The current problem is related to the increment of the capital. Central Bank is clear in this aspect. The banks should maintain the enough capital cushion. Either you do it by float bonus shares, rights shares or debentures, it’s up to you. If you maintain enough capital, your credit flow capacity will not be hit,” NRB Governor Khatiwada added.

According to the financial results of the 30 commercial banks, four commercial banks have below the prescribed CAR. Among them, two are government owned banks while two other are private lenders. The fall in the CAR will put the banks under the pressure to float rights shares, debentures or bonus shares to increase such ratio.

While none of the banks have sought the approval from the capital market regulator Securities Board of Nepal (Sebon) to issue right shares and follow on public offer (FPO), there are chances that the banks struggling to increase the CAR will prioritize the bonus shares distribution in the current fiscal year.-SSN