NRB tightens dividend distribution rules for BFIs

KATHMANDU: Nepal Rastra Bank (NRB) has introduced stricter provisions by amending its existing procedures related to financial statement publication and dividend approval for banks and financial institutions (BFIs). The revised guidelines, issued for the purpose of annual general meetings (AGMs), bring tighter control over dividend distribution practices and strengthen regulatory compliance across the banking and finance sector.

According to NRB, interest capitalized during the grace period of loans must now be allocated into the regulatory reserve fund if it has been accounted for in periodic lending. Similarly, banks and financial institutions issuing debentures or other debt instruments will be required to deposit proportionate amounts into the Capital Redemption Reserve Fund.

The new rules also specify that dividends on non-redeemable cumulative preference shares must be distributed only from the current fiscal year’s profit through the profit and loss account. Neither accumulated profit accounts nor other reserves can be used for such distribution, and NRB will monitor whether this provision is being followed.

In addition, institutions must disclose in their accounting notes whether adjustments of “events after the reporting period” as defined in Nepal Financial Reporting Standards (NFRS) have been made in financial statements issued up to the approval date.

Restrictions on Promoter Shareholding and Dividend Approval

NRB has also tightened conditions on promoter shareholding in banks and financial institutions. A single BFI can invest up to 15% of its paid-up capital in the promoter shares of another BFI and up to 1% in others. For microfinance institutions, the limit is higher at 25% and 10% respectively. Until these prescribed limits are maintained, the concerned institutions will not be allowed to distribute proposed cash dividends or bonus shares.

However, this restriction does not apply when the Government of Nepal, NRB itself, or a BFI invests as a promoter in its subsidiary. Furthermore, state-owned entities such as the Employees Provident Fund, Citizen Investment Trust, and Rastriya Beema Sansthan, where the government holds 50% or more ownership, will be allowed to invest in promoter shares of more than one BFI with NRB’s approval, up to 25% of paid-up capital.

Capital Adequacy Framework and Dividend Approval

The amended procedure emphasizes compliance with the Capital Adequacy Framework (CAF) before cash dividends are approved. Commercial banks and national-level development banks must comply with CAF 2015, while infrastructure development banks must follow CAF 2018. Cash dividend proposals will only be approved after deducting the proposed dividend amount and ensuring supervisory adjustments in core capital.

For finance companies and microfinance institutions (except national-level development banks), dividend declaration must be based on CAF 2007 and the unified directives. They must maintain at least 0.5% of risk-weighted assets as buffer in core capital and 1% buffer in total capital fund.

Only when BFIs meet the minimum requirements—6.5% in core capital and 11% in total capital fund for finance companies and development banks—will NRB approve dividend distribution.

Implications for Nepal’s Banking Sector

The central bank’s decision underscores its push to strengthen financial discipline, enhance capital adequacy, and ensure sustainable dividend practices in Nepal’s banking and financial sector. By tightening dividend distribution rules, NRB aims to safeguard investors’ confidence, prevent excessive risk-taking, and align Nepal’s banking system more closely with international regulatory standards.

The move is expected to have a significant impact on how banks and financial institutions plan their AGMs, manage profit distribution, and balance capital adequacy requirements—ultimately shaping the business environment for Nepal’s financial market and foreign investment inflows.