Paid-up capital for commercial banks raised
They will be required to meet Rs one billion limit by January 1, 2003
By SHABBIR H. KAZMI
Jan 01 - 14, 2001
The State Bank (SBP) has raised the minimum paid-up capital requirement of banks from Rs 500 million to one billion rupee. According to an SBP circular, issued to all the commercial banks listed at local stock exchanges, the banks are required to enhance their paid-up capital — net of losses — to Rs 750 million on January 1, 2002 and to one billion rupee on January 1, 2003. The penalty for not meeting this requirement is the removal of scheduled status, hence limiting the scale of services banks can provide and customers they can cater to.
The circular says the minimum paid-up capital has been raised to facilitate the banks to strengthen their competitive ability, both domestically and internationally. It will also make the banks cost effective by upgrading their technology and eliminating avoidable expenses. The upward revision in paid-up capital will strengthen the equity base of the banks to the levels, where the interest of depositors are adequately protected. It will encourage the economies of scale and economies of scope.
The minimum paid-up capital requirement for banks, before the announcement, was Rs 500 million. The central bank is of the view that this low level has resulted in too many players. The Governor of the SBP has been for quite some time asking banks to raise their capital voluntarily through merger and acquisition actively before the central bank made the formal announcement. Bankers say the upward revision in the minimum paid-up capital requirements will particularly force a couple of small domestic private banks to either close down their operations or to merge themselves with other banks.
According to a report by Khadim Ali Shah Bukhari & Co., out of 14 listed banks only Muslim Commercial Bank and Faysal Bank meet the overall requirement. Askari Commercial Bank, Bank of Punjab and Union Bank are sufficiently close that meeting the required target. However, other smaller banks are likely to be pushed to meet the requirement and the sector may see a spate of merger and acquisition activity in the sector in the next couple of years.
The move is a step in the right direction though many analysts believe that the criterion should have been tougher — at least two billion rupee by January 2003. Capital adequacy is not a big issue with the listed commercial banks where average capital adequacy is in excess of base requirement of 13 per cent of risk adjusted assets and far in excess of the 8 per cent requirement of the central bank. The real issue is the feasibility of the smaller banks in an environment where the big five are busy in restructuring their balance sheets to allow faster loan book growth in the coming years — in a situation where loan growth in the economy is likely to be limited.
Paid-up capital Net of losses
(Rs in million)
Bank AL Habib
Bank of Punjab
(a) No banking company shall be permitted to undertake a full range of financial services unless and until it has a minimum paid-up capital, net of losses, of one billion rupees on or after 1st January 2003.
(b) A banking company not meeting the minimum capital requirement as set herein above shall stand de-scheduled and converted into a non-scheduled bank with effect from the dates as determined below:
(i) On 1st January 2002, if it does not have a minimum paid-up capital, net of losses, of Rs 750 million.
(ii) On 1st January 2003, if it does not have a minimum paid-up capital, net of losses, of Rs 1 billion.
(c) Where a banking company so de-scheduled is short in meeting, the minimum capital requirement of Rs 1 billion by more than 25 per cent such non-scheduled bank (NSB) shall not be eligible for collecting deposits from the individuals including partnerships/sole proprietors, or provide any financial services to individuals including sole proprietors. Such NSBs shall only be permitted to operate in inter-bank market, make investments in government securities, and finance import/export business within such limits as may be specified by the State Bank on case to case basis.
(d) Where a banking company, so de-scheduled is short in meeting the minimum capital requirements of Rs 1 billion by not more than 25 per cent, the State Bank on a request made to it in this behalf may allow the banking company to continue accepting deposits from their corporate/institutional depositors only up to the limit of total deposits mobilized by it as on December 31, 2000 or total outstanding deposits as on November 30, 2000, whichever is lower and provide such other support financial services as may be specifically allowed by the State Bank.