Even if the finance company distributes 20 percent bonus shares next year, its paid-up capital will reach Rs 590 million. Another 20 percent bonus shares in 2016/17 will raise its paid-up capital to Rs 720 million - Rs 80 million short of the regulatory requirement. It can meet the new requirement by offering 12 percent right shares to the shareholders.
Om Finance has already signed a memorandum of understanding (MoU) for merger with City Development Bank (CDB) which has license to operate in 10 districts. Headquartered in Pokhara, CDB has paid-up capital of Rs 460 million. The development bank is in position to raise its capital base to Rs 590 million by offering stock dividends to its shareholders from the profit earned in 2014/15.
The merger is expected to increase their capacity to offer more than 20 percent bonus shares which will raise the paid-up capital of the merged entity to Rs 1.57 billion by the fiscal end of 2016/17. To become a national development bank, it will have to have paid-up capital of Rs 2.5 billion. It will have no option to go for another merger to become a national-level development bank.
"Merger, bonus shares and rights issue are the better options for us," Bishwo Mohan Adhikari, CEO of City Development Bank, which recently submitted the capital increment plan to the NRB, said. Though the development bank has an option to go for rights issue worth Rs 920 million, Buddhi Malla, CEO of Om Finance Ltd, said that it would be a bit difficult to float rights issue of such a high volume. "It will be difficult to ask investors, who have received bonus shares for consecutive years, to invest money for rights shares. Thus small rights issue can be considered if capital is inadequate even after merger and acquisition," he added.
All development banks and financial institutions based in Pokhara have already submitted their capital increment plan to NRB as per the central bank's instruction. Most of them have given priority to merger.
Though development banks and financial companies in Pokhara, which have been posting higher profit compared to BFIs in other parts of the countries, are offering higher dividend, they are not capable enough to raise paid-up capital by four times by offering stock dividends alone.
Unveiling the Monetary Policy for Fiscal Year 2015/16 on July 23, NRB had raised the minimum paid-up capital of BFIs by multiple folds. The BFIs have been given two years to meet the new capital requirement.
Muktinath Development Bank, which earned Rs 180 million as net profit in the last fiscal year, will fall short of Rs 131 million to meet the new capital requirement of Rs 250 million required by mid-July of Fiscal Year 2016/17. This is possible only if the development bank floats 110 percent of rights issue.
Metro Development Bank Ltd (MDBL), which holds license to operate in three districts, has also looking for merger to increase its capital base. MDBL CEO Surya Tiwari told Republica that the bank has not yet decided about the partners for merger. Kamana Development Bank and Kaski Finance Company Ltd are also in the process of undergoing merger. These two companies, which made net profit of Rs 64 million and Rs 48.1 million, respectively, in the last fiscal year, will have paid-up capital of Rs 580 million post merger. Even if the merged entity manages to distribute 20 percent bonus shares, it will need Rs 970 million to meet the paid-up capital requirement of Rs 2.5 billion by 2016/17.
Govinda Dhakal, CEO of Garima Development Bank Ltd, has also put merger in priority. "Merger, acquisition, and bonus and rights issues are the only alternatives that we have at present," Dhakal, who is also the secretary of Development Bankers Association, Nepal, said.
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