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Merger and Acquisition

Mergers in Nepal's banking sector have resulted in positive outcomes such as growth in credit and deposits, higher profits, and stronger risk management. The number of banks and financial institutions decreased from over 200 in 2012 to around 110 currently through mergers encouraged by the Nepal Rastra Bank. Mergers help address issues like weak capital bases, high operating costs, and unhealthy competition between many small institutions. However, mergers also present challenges in finding the right partner, setting fair share values, and managing employee impacts. Overall, consolidation in the banking sector through mergers and acquisitions has strengthened institutions and promoted stability.

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45 views

Merger and Acquisition

Mergers in Nepal's banking sector have resulted in positive outcomes such as growth in credit and deposits, higher profits, and stronger risk management. The number of banks and financial institutions decreased from over 200 in 2012 to around 110 currently through mergers encouraged by the Nepal Rastra Bank. Mergers help address issues like weak capital bases, high operating costs, and unhealthy competition between many small institutions. However, mergers also present challenges in finding the right partner, setting fair share values, and managing employee impacts. Overall, consolidation in the banking sector through mergers and acquisitions has strengthened institutions and promoted stability.

Uploaded by

Rojila luitel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Mergers have resulted in the growth of credit and deposits along with higher earning

power and strengthening of risk management capacity.

by Pragati Karki | June 29, 2022

ECONOMY

6 minute read


 


 


 


Merger and Acquisitions (M&A) is a widely used business strategy for restructuring
through consolidation among two or more organizations into a common objective or a
complete takeover of one organization by another. The reason for this is usually to help
achieve competitiveness, promote efficiency, reduce cost and/or increase profit. M&A,
as a tool proves to be an efficient one to facilitate consolidation in the financial system.
This has helped reshape the banking industry across the globe. Originated in the US,
during the early 1980s, the M&A was amplified by the Asian Financial Crisis of 1997-98
and the Global Financial Crisis (GFC) of 2007-08. After these crises, the banking
industry underwent a period in which banks focused on establishing a resilient financial
system and enhancing risk management. As a result, regulation concentrating on the
increasing capital base and the merger of the Banking and Financial Institutions (BFIs)
was introduced across the world.

The establishment of Nepal Bank Limited (NBL) in 1937, commenced Nepal’s formal


financial sector. However, till mid 1980s Nepal’s financial system remained
underdeveloped and concentrated as only state-owned financial institutions were in
operation, that were located largely in urban cities. With the adoption of the liberalization
regime, the financial system in Nepal witnessed an increase in private sector
participation. Policies related to expansion of financial access and availability of
resources in rural areas were introduced resulting in significant growth in financial
institutions in the 1990s and 2000s. Despite, BFIs’ rapid growth in Nepal, the banking
system was labeled to have a low volume of turnover, high-interest rate sensitivity, wide
interest rate spread, inefficient management and a lack of capacity to finance large-
scale projects. In addition, the financial system had displayed regional disparity and was
more urban centric, which led to an inadequate and centralized financial inclusion.

Overview of Merger and Acquisitions in Nepal

In 2012, the number of BFIs had reached up to 220, which included 32 commercial


banks, 88 development banks, 77 finance companies and 23 Micro Finance Institutions
(MFIs). In comparison to the size of Nepal’s economy, the number of BFIs was high.
This led to an unhealthy competition among the BFIs for deposit collection, loan
disbursement and a growing share of bad loans causing issues of underperformance of
BFIs. Thus, Nepal Rastra Bank (NRB) introduced Merger Bylaws Policy in 2011 to
enhance the capacity of banks for healthy competition among foreign counterparts
which were anticipated to enter the market. NRB also introduced various regulatory
provisions such as acquisition bylaw in 2013, which later integrated into merger and
acquisition bylaw of 2016. The monetary policy of 2015/2016 increased the minimum
paid capital by four times for the financial institutions. In 2015, commercial bank paid up
capital was NPR 4 billion, which has increased to NPR 18 billion in 2021.

NRB has made continuous efforts to encourage mergers of BFIs through annual


monetary policies. There are incentives provided in terms of relaxation in regulatory
ratio. Policy such as relaxation in maintaining cash reserve ratio (CRR) and credit to
capital and deposit (CCD) ratio were introduced to incentivize a merger. This would
allow BFIs to have access to additional liquidity, allowing them to increase their lending
as well as help them with business expansion. Relaxation in sectoral lending targets
would also help banks to focus their lending on the lucrative sector rather than having to
meet the regulatory requirement of NRB.

NRB’s continuous attempt has led to noteworthy progress in reducing the number of
BFIs through a merger which has created stability and credibility. The number of BFIs
engaged in merger as of mid-March, 2022 has reached 239, out of which 177 BFIs’
license have been revoked. Currently, there are  27 commercial banks, 17 development
banks, 17 finance companies and 66 microfinance institutions. The merger has
improved the financial position of weak institutions when merged with a strong
institution.

Reasons for a Merger

The banking industry is one of the most regulated industries in Nepal. With the
decreased number of BFIs, it will allow NRB to carry out its supervisory role smoothly.
The decline in the number of BFIs through mergers can reduce unhealthy competition.
Furthermore, there is a limited supply of fresh deposit available in the market, causing
a liquidity crunch, pushing BFIs to compete to attract deposits by offering higher interest
rates, which gives rise to an unhealthy competition among each other. Higher
competition can reduce lending standard and lower profitability of banks. Such poor
lending standards can impact the stability of the banking system.
Many BFIs with a small capital base are unable to invest in large infrastructure projects.
Through mergers when banks combine, their capital bases increase, further increasing
their ability to lend for projects that require a large investment. A higher number of BFIs
also means higher operating costs, which reduce profitability of the BFI as each BFI
possesses a number of fixed assets such as buildings, and infrastructure. However,
with mergers, these costs can be reduced through layoffs, reduced number of location
and equipment, technological advancement etc.

Challenges of Merger

Despite merger being the ideal solution to problems faced by the banking sector, it has
its own set of challenges. The main challenge of merger would be finding the right
partner to merge with. The right partner would help achieve long-term goals and the
terms of the merger would align the two parties, leading to an easier formation of a
newly merged BFI. Decision to set a swap ratio for the purchase of share during a
merger of BFI between the parties, also pose as a challenge. Additionally, mergers
have an impact on employees, customers, and various stakeholders who are
associated with the two said parties. Employee management is a crucial process after a
merger as human resourcesare the major component of any organization and their work
systems and policies may experience fundamental changes. Disputes can arise during
an adjustment period between the employees and management regarding job role, job
security, remuneration, compensation etc.

Conclusion

For the past many years, mergers of banks and financial institutions have been
beneficial. Mergers have resulted in the growth of credit and deposits along with higher
earning power and strengthening of risk management capacity. The consolidation of
poor performing banks with strong performing bank have created competitive and
standard financial institutions. For further growth of the sector, there is a need
for discussion among the regulatory bodies and BFIs to create plans and policies
accordingly. Banks and regulators must exhibit some degree of flexibility to promote
growth and stability. Furthermore, to encourage banks to pursue merger and acquisition
activities, the government should take a supporting role and provide effective incentives.

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