28th August 2025, Kathmandu
The Nepal Rastra Bank (NRB) has revised its guidelines for banks and financial institutions (BFIs), imposing stricter rules for dividend approval.
NRB Tightens Dividend Approvals
The central bank’s goal is to improve financial stability and protect investors by linking dividend distribution directly to the institution’s financial health, including capital adequacy and compliance with shareholding regulations. The new measures signal a stronger regulatory environment, aiming to ensure that dividends are paid out only when a BFI is in a sound financial position.
Key Revisions to Dividend Guidelines
The updated framework introduces several critical conditions that BFIs must meet before they can receive approval to distribute dividends. These new rules are designed to prevent excessive payouts that could compromise an institution’s stability.
Capital Adequacy and Shareholding Limits: A BFI that holds more founder shares than permitted by paid-up capital regulations will be barred from distributing both cash dividends and bonus shares. This is a crucial step to enforce compliance with existing shareholding limits. The new rule incentivizes BFIs to adjust their ownership structure and ensures that dividends are not approved for institutions that fail to meet these fundamental governance requirements.
Supervisory Adjustments and Minimum Capital: Dividend approval is now contingent on the BFI meeting its minimum primary capital requirements and maintaining sufficient capital buffers after supervisory adjustments. For example, development banks and finance companies outside the national level must have at least 6.5% primary capital and 11% total capital before they can declare a dividend. This condition ensures that the BFI has a robust financial foundation to absorb potential losses.
Investment Limits: The NRB has also reiterated its investment limits for BFIs. A bank can invest a maximum of 15% of its paid-up capital in a single BFI and up to 1% in other BFIs. For microfinance institutions, the limits are set at 25% for a single entity and 10% for others. These limits are in place to prevent over-concentration of risk within the financial sector.
Merger and Acquisition Considerations: When a merger or acquisition takes place, the combined paid-up capital must meet the required thresholds. If there is a shortfall, the amount must be recorded in the capital reserve fund, and dividends cannot be distributed from this reserve. This measure prevents BFIs from using merger-related gains to fund dividends and instead requires them to use these funds to strengthen their capital base.
Implications and Broader Context
The revised guidelines have far-reaching implications for Nepal’s financial sector. For institutions that have previously relied on less stringent rules, this marks a new era of stricter dividend governance. It forces BFIs to prioritize financial stability and compliance over short-term dividend payouts. This move aligns with international financial regulatory practices, such as the Basel Accords, which emphasize capital adequacy and risk-based supervision to ensure the long-term sustainability of the banking system.
For investors, the new rules offer a layer of protection. By restricting dividends to only financially sound institutions, the NRB ensures that investors receive payouts from BFIs that are healthy and well-capitalized, reducing the risk of a financial institution’s collapse due to excessive dividend distribution. This move fosters confidence in the banking sector and promotes a more stable market environment.
The new directives also act as a powerful incentive for compliance. BFIs that have been non-compliant with capital adequacy and shareholding rules will now face a direct financial consequence. This will encourage them to take immediate corrective actions to adhere to the central bank’s regulations. Overall, the revised framework reflects the NRB’s commitment to creating a more accountable, transparent, and resilient financial sector in Nepal, benefiting institutions, investors, and the economy as a whole.
For More: NRB Tightens Dividend Approvals