The Nepal Rastra Bank (NRB) has enforced tighter regulations on banks and financial institutions (BFIs), setting strict conditions for dividend approvals to their shareholders.
The central bank, through new guidelines, stated that BFIs can now distribute dividends on unredeemable non-cumulative preference shares only from the profit of the current fiscal year, after adjusting the profit and loss account in the balance sheet. The NRB will also closely monitor compliance regarding retained earnings and funds restricted from expenditure.
Under the rule, cash dividends may be declared or distributed only from surplus amounts exceeding the minimum core capital and other capital funds, including buffers and supervisory adjustments. For commercial banks and national-level development banks, dividend approvals will be based on the Capital Adequacy Framework 2015, while infrastructure development banks must follow the Capital Adequacy Framework 2018.
Similarly, development banks, finance companies, and microfinance institutions are required to strengthen their capital base before distributing dividends. Development banks must increase their primary capital by 0.5 percentage points, while finance companies must maintain 6.5% primary capital and a minimum 11% total capital fund under the Capital Adequacy Framework 2007. Microfinance institutions are required to hold at least 0.5% buffer capital and maintain a 9% total capital fund when declaring cash dividends.
The NRB has also barred BFIs from distributing dividends if they fail to maintain the monthly average interest rate spread as per the directive or if they are unable to clear outstanding loans pledged in the name of promoters with more than 2% shareholding, even after five years of operations.
Additionally, if a merger or acquisition results in a paid-up capital lower than the combined capital of merging entities, the deficit must be recorded in the capital reserve fund. Failure to do so will render BFIs ineligible to distribute dividends.
