National Bank of Kenya faces tough options in raising more than $130 million in capital that analysts say it needs to comply with regulations and become a force in a fiercely competitive market.

After increased bad debt provision pushed the bank into the red, its capital adequacy ratio (CAR) – the minimum amount of money it needs to support deposits – fell to 13 per cent.

READ: How non-performing loans reversed NBK’s performance

While this is still above the minimum level of 10 per cent, the big banks that NBK aims to rival have a CAR of more than 20 per cent. The bank hoped to close this gap through a Ksh10 billion ($97 million) rights issue that was vetoed by the Treasury, one of its principal shareholders.

Analysts, however, say the stakes are now higher and that the bank will, based on its current prudence ratios, require Ksh13 billion ($130 million) to be competitive.

The veto forced the bank to start withholding dividends to shareholders and to transfer part of the profits to general reserves by issuing bonus shares to investors.

Mercyline Gatebi, a research analyst at Genghis Capital, said the government was likely to be left holding the baby because the National Social Security Fund, the largest shareholder, cannot inject more money into the bank, given its current position.

“It’s going to be a tough call for NBK to raise that amount. Consolidation with other lenders (a merger with state-owned Consolidated Bank and Industrial Development Bank has been mooted by the Treasury) could be the likely way out as the preference shares sale within the current conditions is not tenable,” Ms Gatebi said.

Eric Munywoki, head of research and business at Sterling Capital, said the only thing NBK should be looking at is to get a strategic investor to pump in more money. But before this its managers will have to clean up the operational inefficiencies that have led to increased levels of bad debts.

“A cash call could be another option. The two anchor shareholders {government and NSSF} can decide to increase their stakes in the bank but the question is: Are they willing to put in more capital?”

Analysts also say the government as the second largest shareholder and a large preference shareholder may still require to allocate funds for support if it wishes to retain its shareholding. There is also the question of the preference shares, which currently are convertible and cannot be paid off because of the challenges currently facing the bank.

It has also emerged that weak lending policy, ignoring of prudential credit guidelines and vested interests are some of the reasons for National Bank’s surprise loss position.

The EastAfrican has learnt that a savings and credit co-operative (Sacco) is one of the largest bad debtors, with a loan account estimated at $20 million that became non-performing in July last year.

The Sacco’s officials did not respond to our requests for a comment.

Meanwhile, investigations into the financial position of the state-owned lender came to a conclusion, pending discussions on the internal auditors’ management report and subsequent action on the suspects.