Featured, Market Watch

Eagle Eye: Deposits to Right Share

Published by Octron on November 18, 2009

This article is some what an extention of an article submitted by Third Eye: Ice Age: Are we there yet ?.

Remember those long queue days at Nepal Rastra Bank, Nepal Bank Limited, Rastriya Banijya Bank?
People used to stay in long queue with golden token in their hand to get their check processed or to deposit their money. It used to take 2-3 hours to open an account going from one room to another.
To have a bank account with some balance was like a pride then, that something only upper middle class people had. Now the times have changed, so have the banks. From few national level banks, we have around. 20 ‘A’ class commercial banks operating 20-40 branches each across the nation, plus mushrooming development banks, finance companies and cooperatives. Each of them competing with every other financial institution, to grab remittance cash. Gimmicks from 9% interest rate to zero balance accounts with free ATM cards has also become old monkey trick.

So, what is the new trick that we will be discussing today in this special feature?

It is one of the biggest open secret of the banks, who are trying to snatch away money from the very people who invested in their bank. Funny part is the poor investors never realize that they are being robbed. Instead happily hands over their hard earned money to bank just for few paper sheets.

The premise of the game was set when cooperatives and finance companies started competing with banks by giving out unbelievable interest rates (like 15% per annum in FD). In today’s recessive market banks cannot take risk to give such interest rate on savings like cooperatives or finance companies. As cooperatives are limited to deposit amount, so they can take risk of giving high interest rates on savings deposits. Also their operational cost is minimal compared to multi-branched commercial banks.

Whereas, banks can virtually take unlimited deposits, so there is high chance of loss if they start giving hefty interest on their saving and if that cash gets freeze.
Sunrise bank is one of the banks, who fell into the trap when they tried to compete with giving away high interest rate on savings. The bank had announced 6.5% interest rate, as soon as it began its operation and today, it has more in deposits than it has loaned out. Interest expense always negates the Interest income.

Conversely to this bank is Himalyan Bank Limited, which still gives 2.5% interest on their normal savings. On the one hand it did reduce, the banks interest expense by one third compared to Sunrise or any other new banks, but on the other hand it is hardly getting any good deposits. Despite announcement of Rs. 0 Balance Account, Free ATM card people with big sack of money are hardly interested to store money in their bank.

To counter both above mentioned problem banks have already started new scheme, this time they are not interested in depositors money. As, for every Rs. 100 deposited in the bank, the bank will be liable to pay at least Rs. 2.5 (HBL or RBB) – Rs. 6.5 (SUNRISE, BOAN) annually. So this time they are attacking right onto the investors of the bank, i.e. public shareholders. For every share the public bought (for Rs. 100 in primary, or much higher in the secondary market) the bank will not pay single paisa annually, instead they will release Right Share.
Right share is an easiest means to get additional cash into the bank, without having to pay single paisa interest. If you haven’t glanced or thought over recent Right Share announcements, here is a quick overview, through eagle eyes;

Sanima bank had announced Right Share (1:1) nearly a year ago, got undersubscribed and later had to be auctioned. This year, again the bank has already announced right share (1:1.5) instead of dividend. So, for example Mr. ABC bought 10 units of share last year for Rs. 1000 (lets say he got at IPO price). So, in 2065, he paid another Rs. 1000 for another 10 units right share. This year he will be paying another Rs. 3000 (1:1.5) for another 30 units (as he already has 20 units). So for past 2 years, he has been spending Rs. 5000 bucks with ZERO interest income. And same goes for Sanima Bank, they got Rs. 5000 deposit without paying a single paisa in interest for past 2 years.

Another classic example is KIST bank, from its inception, a person who got allotted 10 units of shares is today holding more than 400 units of shares through regular announcement of right shares. Once again it has declared right shares (1:1.5) to raise its paid up capital to 5 Billion. If you check the financial statement of FY 066/67 Q1 report posted by NEPSEGUIDE, the bank which has more than 30 branches, made mere 1.2 Cr profit in this quarter. Investors are not even realizing they are losing money every time they are applying for right share. Instead of getting return from the investment they are simply forced to re-invest into the same company in the name of return. So, if at the moment if you hold 1000 units of shares, then you will have to shed off Rs. 1,50,000 for the right shares.

Wow ! what a return !

Above 2 were mere examples the same applies for BOAN, Citizen, GBL or any other company right share announcements.

When banks can easily accumulate cash through investors through right shares, why would they even care for deposits at high interest rates?
So, investor’s don’t get fooled by right shares. It is pity that 80% of the investors in the share market cannot discern loss from profit, they simply run after right shares, without realizing all they will be accumulating is sheets of paper by paying money annually with zero return. Hoping to make big return some day in future, but forgetting the basic mathematics principle!
As the number of the partners in the company grows, individual profit chunk of the company gets smaller and smaller.

On the final note, I would like to share a quote from one of the finest movie of 90s – The Usual Suspect.

The biggest trick the devil ever pulled was, he made the world believe he doesn’t exist.

So, Beware !

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