NRB Tightens Dividend Approval Rules for Banks and Financial Institutions
Nepal Rastra Bank has issued a revised procedure requiring banks and financial institutions to meet stricter reserve, capital, and compliance rules before distributing dividends.
Kathmandu, Aug 27 (Nepalytix) — Nepal Rastra Bank (NRB) has introduced a revised procedure governing how banks and financial institutions (BFIs) can approve dividends, aiming to curb discrepancies between pre- and post-audit profits and to strengthen capital buffers.
Under the new rules, BFIs must set aside amounts into regulatory reserves if loan loss provisions calculated under NFRS accounting are lower than those required by NRB directives. Similarly, interest capitalized during grace periods must also be allocated to regulatory reserves.
Institutions issuing debentures or other debt instruments must deposit funds proportionally into a capital redemption reserve, while dividend distribution on irredeemable preference shares must come strictly from current-year profits, not retained earnings or reserves.
Key Provisions:
Development banks, finance companies, and microfinance institutions must increase their core capital by an additional 0.5 percentage points before declaring dividends.
Commercial banks and national-level development banks must comply with Capital Adequacy Frameworks (2015 for banks, 2018 for infrastructure banks) to determine distributable profits after supervisory adjustments.
For finance companies and microfinance institutions (except national-level DBs), minimum core capital must be at least 6.5% and capital adequacy at 11%, with microfinance institutions required to maintain at least 9%.
Cash dividends can only be declared if capital adequacy ratios remain above minimum requirements plus buffers after accounting for proposed payouts.
Bonus shares may be issued, but necessary tax provisions must be met through cash dividend allocation.
The revised procedure also imposes restrictions on promoter shareholdings. Promoters investing beyond set limits—15% in a single BFI, 1% in others (25% for microfinance)—will see dividend distributions suspended until compliance is restored.
In merger or acquisition scenarios, differences between pre- and post-merger paid-up capital must be booked into a capital reserve, which cannot be used for dividend payouts. Similarly, amounts transferred to merger reserves cannot be distributed as dividends.
The NRB has also clarified accounting treatment for various reserves in financial statements presented at annual general meetings, underscoring its focus on transparency, capital strength, and investor protection.
Analysts note the tighter framework reflects NRB’s intent to discourage aggressive dividend payouts and ensure that Nepal’s financial sector maintains adequate buffers to absorb shocks.