How deferred amortization to capital redemption reserve practices are affecting shareholders of commercial banks in future periods?

 Nepal Rastra Bank (NRB), through issuance of monetary policy in FY 2076/77 mandated commercial banks to issue at least 25% of paid-up capital prevailing at that time as debentures. The policy of NRB was directed towards stabilizing the interest rate as the bank secured a huge amount of long-term lendable funds.

NRB directives require Banks and financial institutions issuing debentures/other debt instruments shall mandatorily allocate proportionate amount of debenture outstanding over the period before maturity from issuance date from the annual profit every year except the financial year in which the payment is made.

NRB directives require banks and financial institutions, issuing debentures or other debt instruments, to allocate a proportionate amount from the annual profit each year toward the capital redemption reserve until the maturity of debentures, commencing from the issuance date. However, Banks and Financial Institutions followed a practice to apply exemption on the above said directives which requires to allocate proportionate amount in the last five years of maturity.

Due to such practices of commercial banks, we can see huge contrast in distributable dividend of commercial banks having similar level of net profit. The commercial banks having maturity period of debentures before FY 2084/85 have reported deteriorated distributable profit while other commercial banks reported comparatively good distributable profit.

We can see in the below table that Agricultural Development Bank Limited (ADBL) having sub ordinated debt/ debentures of 20.469 Billion (debentures outstanding with maturity period in upcoming next five years worth NPR 8.5 Billion) has allocated 125 Million to debenture redemption reserve while NIC Asia (NICA) having subordinated debt/ debentures of 10.752 Billion (debentures outstanding with maturity period in upcoming next five years worth NPR 6.774 Billion) have allocated 442.722 Million to debenture redemption reserve. The reason behind NICA has less debenture outstanding than ADBL has allocated more amount to redemption reserve is due to the practice of deferring revenue. Now, The compulsory allocation of a huge amount to such reserve and 20% of net profit to general reserve will deteriorate the distributable profit of NICA for the upcoming few years.

We witnessed such instances in published first-quarter report of commercial banks which are summarized below:

(Sampling of presented commercial banks are selected on random basis for informative purpose only.)

The combined effect of deferred amortization of debentures along with huge rise in impairment charges, interest receivable balance and short loan loss provision on Non banking Assets are deteriorating the distributable profit available to ordinary shareholders. We advise investors to gain proper knowledge about accounting practices of the respective companies before making investment decision.