ENHANCING PAID-UP CAPITAL OF COMMERCIAL BANKS
The objective can be better achieved through issue of Right Shares at premium
By SHABBIR H. KAZMI
Mar 15 - 21, 2004
Keeping in view the dearth of quality scrips and influx of funds to equities market, it is the most appropriate time for enhancing paid-up capital requirement of commercial banks. The enhanced capital will further strengthen the financial health of banks and facilitate them in meeting the growing demand for credit by the private sector.
At present the minimum paid-up capital requirement for listed commercial banks is Rs 1,000 million. This should be enhanced to Rs 1,500 million by December 31, 2004 and to Rs 2,000 million by December 31, 2005. This can be achieved with complete ease as shareholders' equity of most of the banks was around this amount at the end of year 2002. Looking the financial results of the banks for the year ended December 2003 it can be said with complete confidence that meeting the enhanced capital requirement does not pose any problem. However, meeting the requirement may be difficult for couple of banks. These are the banks where there was a management change lately.
RIGHT VS BONUS
The suggested approach for enhancing is to go for Rights Issues rather than Bonus Shares. According to some analysts issue of Bonus Shares will help in enhancing capital but it will be only a book entry, changing the nomenclature of retained earnings. Issue of Right Shares can only help in achieving the real benefit. This will, on the one hand, absorb some of the surplus liquidity and, on the other hand, increase the market float of the sector.
Keeping in view the current quoted prices of shares of banks, it is also suggested that Right Shares should be issued at minimum 50% premium. Issue of Right Shares will help in absorbing more of the prevailing liquidity and also enable the banks to create a reserve to further boost shareholders' equity. This amount can be utilized in future for paying dividend.
Some of the critics may argue that enhanced capital will affect the future dividend payout of the banks. However, a credible argument in favour of enhanced capital is that the paradigm shift in banking strategy has already started yielding results, in the shape of higher earnings. Further fine-tuning of strategy can still yield better results.
It has often been said in the past that earnings of banks came under pressure due to massive decline in return on government securities. However, the critics do not have any sympathy with those banks, which have been investing very heavily in government securities. They say, "It was an irony that the return on government securities was exceptionally high in the past. It was only recently that return came down. Therefore, banks must look for new and high yielding investment opportunities rather than complaining about the poor return on government securities."
Lately some of the banks following pro-active strategy started investing in equities to overcome 'surplus liquidity crisis'. However, it raised some concerns and the central bank was quick in advising the banks to bring down their investment in equities within the limits stipulated in Prudential Regulations. Banks have been given the timeframe to meet the requirement. According to some analysts: "The central bank should have not insisted on asking the banks to curtail their investment in equities but should have developed better and more stringent monitoring system".
Saying this these analysts could not resist that the restriction from the central bank opens new vistas. Instead of crumbling the banks should establish fully owned subsidiaries to manage mutual funds. The rational behind flotation of mutual funds is that it will help in overcoming the twin problems, overcoming 'surplus liquidity crisis' and meeting the Prudential Regulation requirements.
However, the analysts also suggest that banks should also be given permission to float open-end mutual funds. It should also be made mandatory that they create balanced fund, not investing their entire fund in any one particular area. Managing an open-end fund keeps the asset management company at its toes all the time.
It is the most appropriate time for enhancing paid-up capital requirement for commercial banks. The market has higher appetite and influx of funds to equities market is expected to remain high. In order to enable the investors to earn modest return on their investment in equities and also to hedge their investment it is mandatory that market float of quality scrips should be increased.
The idea is fully supported by acts of sponsors of commercial banks as some of them have already announced to issue Right as well as Bonus Shares at the time of release of financial results for the year ended December 31, 2003. The other should also be convinced to follow their footprints to further consolidate Pakistan's banking sector to meet the future challenges. The strong and healthy financial is a must for accelerating the pace of economic development of the country.