Cash Dividend Under Capital and Liquidity Pressure
Himalayan Commercial Bank has paid-up capital NPR 20 billion, retained earnings NPR 3.6 billion, risk-weighted assets NPR 200 billion, and CAR 11.8%. It reports NPL 4.8%, top 20 depositors 45% of deposits, credit-deposit ratio 92%, and LCR 105%. The board proposes a 10% cash dividend (NPR 2 billion) and argues CAR is 'above 11%'. The CFO notes that NPR 1.2 billion of substandard loans need additional provisioning, and Rs 800 million of deposits mature within 30 days. NRB minimum CAR is 11%, and the bank must maintain CRR/SLR. The dividend would be paid before the annual audit finalizes provisioning. The board asks whether it can declare the dividend, what the post-dividend CAR would be, and what alternatives exist.
1. Calculate the post-dividend CAR, and the CAR after the additional provisioning, under both dividend and no-dividend scenarios.
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Current capital = paid-up NPR 20 billion + retained NPR 3.6 billion = NPR 23.6 billion. Current CAR = 23.6/200 = 11.8%, which matches the reported figure. A 10% cash dividend is NPR 2 billion. Post-dividend capital = 21.6 billion; post-dividend CAR = 21.6/200 = 10.8%. That is already below the 11% minimum. If the NPR 1.2 billion additional provision is also recognized, capital falls to 20.4 billion and CAR to 10.2%. If the dividend is not paid, post-provision capital is 22.4 billion and CAR is 11.2%. The key point is that the board is comparing 11.8% with 11% before either the dividend or the required provisioning. After both, the bank is at 10.2%, a clear breach. Even the no-dividend case leaves only a 0.2 percentage-point buffer, which is thin for a bank with 4.8% NPL.
2. Can the board declare the dividend? What maximum cash dividend could be paid if the bank must stay at or above 11% CAR after the additional provisioning?
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No. NRB dividend rules require audited accounts, full provisioning, maintenance of the minimum CAR and CRR/SLR, and no regulatory deficiency. Here the dividend is proposed before the audit finalizes NPR 1.2 billion of provisioning, and the post-dividend CAR falls below 11%. The board cannot rely on the pre-provision 11.8%. If the bank must remain at or above 11% after the additional provisioning, required capital = 11% x 200 billion = NPR 22 billion. Pre-dividend post-provision capital = 23.6 - 1.2 = 22.4 billion. Maximum cash dividend = 22.4 - 22.0 = NPR 0.4 billion, or 2% of paid-up capital. That is the absolute accounting ceiling before any supervisory buffer or contingency. Given the 4.8% NPL and maturing deposits, even a 2% cash dividend would be aggressive. A better alternative is to retain earnings, complete provisioning, recover substandard loans, and consider a rights issue or capital injection if growth continues.
3. What liquidity and supervisory risks does the dividend create, and what alternatives should management propose?
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A cash dividend of NPR 2 billion directly drains liquid resources at a time when LCR is only 105%, just above the 100% minimum, and NPR 800 million of deposits mature within 30 days. The top 20 depositors hold 45% of deposits, so a single large withdrawal could pressure liquidity. The 92% credit-deposit ratio also leaves limited cushion. Paying cash would weaken both capital and liquidity, and it would signal that the board prioritizes shareholder payout over prudential buffers. Management should propose: postpone the cash dividend until audited provisioning is complete; retain earnings; reduce the dividend to zero or a token amount only if CAR remains comfortably above 11%; build a contingency funding plan; diversify the deposit base; and pre-arrange committed lines or central-bank facilities. If shareholders need a return, a scrip dividend may preserve cash, but it still requires NRB approval and does not solve the provisioning shortfall.