Lahore, October 26, 2022 (PPI-OT):NRSP Bank’s asset quality witnessed significant impairment. This was due to multiple factors, chief among them was the impact of Covid-19 and the high inflationary environment amidst a slowdown in the economy and high-interest rates. Only recently, the massive floods took a deep toll. This resulted in the erosion of the bank’s capital adequacy ratio, which the bank is required to maintain at 15%. The bank, to supplement, its CAR, issued a Tier II TFC. Apart from this, the bank was seeking equity support from the sponsor shareholder: National Rural Support Programme.

NRSP Board of Directors, as on May 12, 2022, approved an investment up to PKR 2bln into the equity of the bank. It was well noted and comfort was drawn from this. Keeping in view the process, NRSP requested to deposit the money as Share Deposit Money, which was planned to be placed in T Bills by the bank until conversion into share capital. The approval for the same was sought by NRSP from its regulator. The bank management represented that, based on this communication, they also engaged with their regulator, to allow payment, falling due, on the said TFCs, as profit.

The terms of the Tier II TFC require that as per the Lock in Clause, neither profit nor principal, will be payable if such payments will result in a shortfall in the bank’s MCR/CAR or cause an increase in the shortfall. In light of this clause, a mechanism is being worked out whereby the due interest amount would be paid by NRSP on behalf on NRSP Bank. This would be treated as a loan to NRSP bank from NRSP and would not be payable unless CAR of NRSP Bank is above the regulatory requirements. The NRSP’s investment of PKR 2bln (PKR 1,930 million as share deposit and PKR 72mln as loan allocation) would remain marked in an escrow account.

The bank management has also represented that they are seeking approval from their regulator to allow profit payment, falling due, based on the Share Deposit Money. Lately, on 14 Oct,22 in continuation of their letter on 26 Jul,22, the Bank requested grant approval for the specified arrangements. The quantum of benefit to the CAR based on the Share Deposit Money may vary now, as against when the process was initiated. At that time, it was forecasted to help achieve a CAR of 17%. These approvals are requisite for the repayment of the profit payment, given the aforementioned circumstances.

The ratings are dependent upon the out-turn of management’s plans to complete the process of approvals to make the payments. Also, on their strategy to steer the risk profile of the bank toward an improved trajectory. Any non-compliance with the regulatory or contractual obligations would be negative for the ratings.

For more information, contact:
Analyst,
The Pakistan Credit Rating Agency Limited (PACRA)
Awami Complex, FB1, Usman Block New Garden Town,
Lahore, Pakistan
Tel: +92-42-5869504-6
Fax: +92-42-5830425
Email: hammad.rashid@pacra.com
Website: www.pacra.com