Source of Bank Capital

A bank collects capital. The capital a bank collects has different sources. The sources from which capital is collected ie. by issuing shares or by taking loans are the fundamental or main sources of bank capital. In other words, the capital can be classified into the equity capital of the bank and the borrowed capital of the bank.

The capital collected by issuing the bank's shares is called share capital. The capital received from the shares, which are invested in the company by the shareholders, is legally considered the property of the bank (itself). The amount received in this way is not considered a loan of the bank. The bank does not have an obligation to return such an amount to the shareholders. the bank need not return the collected amount from the shareholders in any form until the bank is dissolved. There are two types of shares; preference shares and equity or ordinary shares. Preference shares too are of four types; cumulative preference shares, Non-cumulative preference shares, participating preference shares, and non-participating preference shares, and redeemable preference shares. The commercial banks except on conditions of permission given by the Nepal Rastra Bank can not issue preference shares. The medium of collecting capital by the bank is the issuance of equity shares. Under Section 2(c) of the Company Act, 2053 (1996), shares mean the divided part of the capital of the company. Ordinary shares mean shares, except right share or preference share. A bank collects capital by issuing ordinary equity shares. This is the bank's owned capital.

(A) EQUITY CAPITAL OF BANK

Owned or equity capital of a bank comprises the amounts raised from the following sources:

1. Ordinary Share

A bank accepts to take share capital as its strongest and most believable source. A bank is a public limited company. The persons or the institutions who want to from a bank, by taking some shares, by signing necessary documents after getting the permission from the Nepal Rastra Bank, go to the office of the Company Registrar to have it registered. These persons of the institutions are called the promoters Then the company may again all out the public people to buy the rest portion of the shares. By accomplishing certain legal processes, the bank collects the cash by selling the shares to the public. These persons too are shareholders. In this way, the bank gets the largest part of the bank capital from the promoter shareholders and the ordinary shareholders.

2. Preference Share

Preference share means the share, which gets preference over the ordinary share while distributing the dividend and dissolving the bank. But in Nepal, the bak cannot issue preference share except in special conditions. The banks can collect capital by issuing preference shares if NRB  gives permission. The capital received in this way tool is the bank capital.

3. Bonus Share

Bonus share means, the share issued by capitalizing the saving fund or reserved fund from the profitability of the company and issuing additional shares to the shareholders, and that word also denotes growth in the paid-up price of the share by capitalizing the reserve or saving fund. Distributing bonus shares to its shareholders,  a bank eeps the cash fund in it. From it too, the bank collects some of the parts of the capital. The capital collected in this way too is called bank capital.

4. Retained Earnings

The bank gets income by investing in different sectors because the objective of the bank is to gain profit. The bank invests its capital in productive, profitable industries and businesses. The bank gains more or less income from it in a fiscal year. The amount earned (retained) in this way is called bank capital. This too is considered on the sources of bank capital.

5. Reserve Funds

In the course of banking transactions, the bank keeps some parts of its capital in the reserve fund. The ratio of this amount is based on the bank's rules and regulations. The bank keeps some part of its income in the reserve fund. The bank invests the amount kept in such fund., in the liquid sector and gains some income. The amount kept in such a fund and the retained amount from that fund is bank capital.

6. Undistributed Dividend

A bank earns a profit. Such profit may be a lot or little. After it gains the profit, the bank performs the task of distributing the dividend. But the bank, to keep its financial condition strong, does not distribute all the dividend shares. It distributes some of the parts of the dividend to the shareholders and keeps the rest of the dividend in the bank and again invests it. The amount invested again in this way is considered the capital of the bank. For this, the ban should complete the necessary legal process.

B. BORROWED CAPITAL OF BANK

In addition to the above-mentioned sources, the bank collects capital from other sources too. The capital collected in this way is called borrowed or loan capital. Under this title, the following types of sources can be described.

1. Sale of debenture

The debenture means a debenture bond issued by the company against a pledge or guarantee of its assets. Commercial banks are considered public limited companies because they are registered Under the Company Act 2053 (1996), Commercial Bank Act 2031 (1974), and the Nepal Rastra Bank Act 2058 (2002). If it feels the necessity of capital, it can collect capital by issuing debentures. The amount, which is collected in this way, too is called bank capital. This is one of the very important sources of bank capital.

2. All Types of Deposits

A bank accepts all sorts of deposits from the person, organization, and institutions who open an account with it. The amount collected in the current, saving, and fixed accounts is called borrowed capital. the amount is deposited in the above given three accounts, where the bank provides certain interest to the depositors of saving and fixed account holders. The amount deposited in the bank as the deposit is called bank capital. IT is a reliable and strong source of bank capital.

3. Loan from Central Bank

The Nepal Rastra Bank is the central bank of Nepal. This bak is the most powerful and supreme bank. To obey the policy and instruction given by it is the legal duty of other banks. So, the central bank provides the loan to the commercial banks in need. The amount received by commercial bak s from the central bank is called the bank capital.

4. Loan from the Financial Institutions

In a time of need, a bank can take debt from a financial institution. The financial institutions provide loans. Thus, the loan amount taken by the bank from the financial institutions too is called bank capital. This is one of the sources of bank capita.

5. Loan from the Commercial Bank

Commercial banks can contain the debt with or without an internal contract. Thus, during the economic crisis, the commercial banks solve the problem by taking the borrowed as internally. The amount taken as borrowed by one bank from another bank is also called bak capital.

6. Loan from the Central Office and Branch Office

IF the central office of a bank needs the cash amount it can take a loan from its branch offices, similarly, if the branch offices need a loan, they can take a loan from the central offices. Branch offices of a bank can take loans from one another. This is also called capital. This is known as the temporary source of loan capital. The capital collected from the above-given process or sources is considered, as bank capital.

The Nepal Rastra Bank issued a circular dated 2053 (1996)-1-6 regarding the bank capital. The following descriptions of a bank capital have been divided into tow two parts: Primary and Complementary

The following titles are placed under the primary fund of capital

• Paid-up capital of shareholders
• Share Premium
• Undistributed dividend
• Ordinary Reserve Fund
• Non-redeemable preference share

The following titles are placed under the complementary capital fund

• Revaluation (reserve) of the assets.
• Redeemable exchanges, rise, and fall reserve
• Redeemable preference share
• Risk Fund
• Another reserve fund for a not separated special purpose.

Thus, though it can be considered as a good system because the capital fund is divided into primary and complementary and also the titles too are fixed, it has still not clarified titles and kept mere titles. Yet, we find it has attempted to provide wide coverage of the bank capital.