Crystal Finance under NRB scanner
Central bank finds low capital adequacy ratio
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KATHMANDU, JAN 28 -
One more financial institution could face prompt corrective action (PCA) of the Nepal Rastra Bank. Central bank sources said the NRB is seriously mulling imposing the PCA against Crystal Finance Limited after it found that the latter’s capital adequacy ratio was below the regulatory requirement.
According to the sources, along with lower capital adequacy ratio, issues of bad corporate governance at Crystal Finance also forced the central bank to think about taking strong action against it.
As per the NRB regulation, class ‘C’ financial institutions need to maintain capital adequacy ratio of 11 percent. This ratio is a measure of the amount of a bank’s core capital expressed as a percentage of its risk-weighted asset.
According to a senior NRB official, the second quarter report of the financial institution showed the capital adequacy ratio was below the regulatory standard. The NRB has already dispatched a letter to the finance company, seeking a clarification. The company is, however, yet to respond. “If justification provided by the financial institution is found unsatisfactory, the central bank will not delay in enforcing PAC on the company,” a senior NRB official said.
However, the central bank will decide on the level and the nature of the PAC measures only after it receives a reply and carries out further investigation.
The NRB has been closely inspecting the book and the business of the finance company. “While doing so, we have observed plenty of other instances of bad corporate governance within the company,” said NRB sources. According to the NRB, the company’s board and management were found involved in various irregularities while extending loans and advances, such as lending without properly assessing a project or the collateral.
The NRB’s PCA Bylaws 2008 says that if the capital adequacy ratio is less by 2 percent of the mandatory requirement, NRB will discuss corrective measures with the top management and board of the financial institution concerned and record the discussions.
Similarly, the NRB will ask the financial institution to present a recapitalisation plan and bar it from distributing dividend and bonus shares. NRB also bars financial institutions from opening new branches and limits deposit collection.
According to same bylaws, if the ratio falls by 2 to 4 percent, the central bank imposes further restrictions like limiting lending, acquiring prior approval from NRB before launching a new business line and barring it from buying and leasing additional fixed assets.
Posted on: 2012-01-28 09:21
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