Governor’s push for cash dividends sparks concern over loan expansion capacity

KATHMANDU: Nepal’s banks and financial institutions collectively hold the capacity to expand loans worth nearly One trillion rupees based on the credit-to-deposit (CD) ratio, but capital adequacy pressure has constrained lending despite ample liquidity in the system.

According to Nepal Rastra Bank (NRB), the average CD ratio across the banking sector currently stands at 76.47 percent, far below the regulatory ceiling of 90 percent. In principle, this indicates significant room for loan expansion. However, banks are unable to push lending due to weak credit demand and persistent stress on their capital adequacy ratios.

Basel III Pressures and Capital Adequacy

Under the international Basel III capital framework adopted by NRB, banks must maintain a minimum 11 percent capital adequacy ratio—8.5 percent in core capital (Tier I) and an additional 2.5 percent in supplementary capital (Tier II). If credit expansion outpaces GDP growth, lenders are also required to add a 0.5 percent counter-cyclical buffer. For the current and previous fiscal year, however, NRB has kept this buffer at zero.

Despite this regulatory flexibility, many banks that previously engaged in aggressive and poor-quality lending are under strain due to rising non-performing loans and provisioning requirements. As a result, although liquidity conditions allow for lending of up to NPR 1 trillion, capital stress means banks may not be able to deploy more than NPR 700 billion effectively.

NRB’s 12% Credit Growth Target

In the current monetary policy, NRB has set a 12 percent credit growth target—roughly equivalent to NPR 7500 billion. This projection assumes banks will issue rights shares and prioritize bonus shares over cash dividends to strengthen their capital base.

However, Governor Bishwanath Paudel has recently emphasized that banks must distribute cash dividends, a stance that could further weaken banks’ capital adequacy and lending capacity.

“If banks are compelled to pay cash dividends instead of issuing bonus shares, it will directly reduce their retained earnings and erode lending capacity,” a senior banker told Fiscal Nepal, adding that banks facing capital stress would struggle to meet NRB’s lending target.

Bank-wise Capital Adequacy Picture

The latest Basel III reports highlight significant variation in banks’ capital adequacy positions:

Standard Chartered Bank Nepal: Highest core capital ratio at 15.80% and total adequacy ratio at 17.82%.

Everest Bank: Core capital 10.42%, adequacy 13.28%.

Nabil Bank: Core capital 9.52%, adequacy 11.94%.

Global IME Bank: Core capital 10.66%, adequacy 12.97%.

NIC Asia: Core capital 8.86%, adequacy 14%.

Nepal Investment Mega Bank: Core capital 11.09%, adequacy 13.73%.

Kumari Bank: Core capital 8.94%, adequacy 12.98%.

NMB Bank: Despite not distributing dividends for two years, core capital remains 9.46%, adequacy 12.62%.

Prabhu Bank: After reporting distributable losses, core capital 10.19%, adequacy 13.90%.

Machhapuchchhre Bank: Core capital 9.41%, adequacy 13.32%.

Himalayan Bank: Post-merger with Civil Bank, core capital 8.79%, adequacy 11.64%.

Citizens Bank International: Core capital 8.94%, adequacy 12.45%.

Siddhartha Bank: Core capital 9.88%, adequacy 11.77%.

Nepal SBI Bank: Core capital 9.73%, adequacy 13.03%.

Prime Commercial Bank: Core capital 10.39%, adequacy 11.74%.

Sanima Bank: Core capital 9.86%, adequacy 13.01%.

Among state-owned banks, Rastriya Banijya Bank faces severe capital stress, with its core capital falling to 9.46% and total adequacy at just 11.84%. The bank has struggled to issue bonds on time due to delayed approvals from the Ministry of Finance. Meanwhile, Nepal Bank Limited remains in distributable losses despite reporting a core capital adequacy of 10.05% and overall adequacy of 13.06%.

Conversely, Agricultural Development Bank has improved profitability in the latest quarter, posting a core capital adequacy ratio of 11.93% and total adequacy of 13.6%.

Dividend Policy at the Core of Dispute

The tension between NRB’s capital adequacy requirements and the Governor’s push for cash dividends remains a key factor. Distributing cash dividends reduces retained earnings, eroding banks’ capital buffers and credit capacity. In contrast, issuing bonus shares increases paid-up capital, strengthens ratios, and keeps liquidity within the institution.

“NRB officials internally acknowledge that banks should prioritize bonus shares this year. Relying solely on cash dividends could derail the 12 percent lending growth target,” an NRB official told Fiscal Nepal.

With Dasain approaching, banks that distribute cash dividends may see their Basel III reports tighten in the fourth and fifth months of the fiscal year, raising further doubts about whether Nepal’s credit growth target can be achieved.