The latest recapitalization attempt by the ailing state-owned bank, with a negative core capital of Rs 4.22 billion, will completely fix its balance sheet, which is full of holes created by chunk of bad debts it had accumulated till 2002.[break]
As per the two-year plan, the bank will be allowed to raise Rs 2 billion through issuance of right shares to its shareholders and another Rs 2 billion through sales of a part of its fixed asset, Bhaskar Mani Gyawali, spokesperson of Nepal Rastra Bank (NRB), told Republica on Tuesday.
But these methods of injecting fresh capital are subject to the government´s approval. This clause has been introduced because the state has 40 percent stake in the bank. This means the state will be approached to invest around Rs 1.5 billion after rights issuance - something which may not interest the government.
That is why the NRB, the banking sector regulator, has asked the bank management to come up with a clear roadmap on how to steer forward, Gyawali said, indirectly referring to the government-approved practice of selling rights shares to the third party.
Once the bank gets additional capital, its capital adequacy ratio - that measures the strength of a financial institution -- will rise above 10-percent mark. As of now, the bank´s capital adequacy ratio stands at a negative of around 9.5 percent - way below the regulatory requirement of 10 percent.
Because of the bank´s fragile state, the stock-market regulator had also de-listed the company. But Gyawali clarified the action taken by the stock market regulator will not come in the way of issuing rights shares.
A stock market expert told Republica that since the company is de-listed it is as good as a firm which has not been listed on the stock market. "So, the bank´s decision to issue rights will not be reviewed by the regulator as it is not a listed company," he added.
However, there are concerns that the bank may not be able to obtain fair value through sales of fixed asset, because of downturn seen in the real estate business.
Gyawali called this argument ´valid´. "But the bank is in immediate need of capital and this is the only way to allow it to grow," he said.
Nepal Bank Limited has fixed assets worth around Rs 14 billion at current market price. At distressed value, they are worth around Rs 9 billion.
Established in November 1937, the bank, which has paid-up capital of Rs 380 million, started incurring losses due to government intervention, lack of qualified human resources and shortage of effective business strategies. As a result, its non-performing loan (NPL) touched 59 percent of the total credit portfolio in 2002.
To spruce up its performance, it underwent a reform program in July 2002. Since then the bank´s NPL has come down to 5.2 percent and has started generating operating profits as well, raising hopes of its viability.
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