Nepal Rastra Bank (NRB) has urged commercial banks, development banks and finance companies to initiate the merger and acquisition process. The merger and acquisition process has been going on for the last five years. In 2015, NRB, through the 2015-16 monetary policy, forced commercial banks to raise their capital to Rs. 8 billion (from Rs. 2 billion), development banks to Rs. 2.5 billion (from Rs. 640 million) and national-level finance companies to Rs. 800 million (from Rs. 200 million). The main thrust of this initiative on the part of NRB was to encourage BFIs to go for the merger and acquisition process, thereby reducing the number of banks and financial institutions (BFIs). Although this provision has resulted in the merger and acquisition of a large number of development banks and finance companies, NRB is not satisfied with the pace of the merger and acquisition of commercial banks. In fact, the headway in this direction is dismal; the number of commercial banks has come down from 32 to 27 only.
Merger bylaw The step directing towards the merger and acquisition of BFIs is in line with the Merger Bylaw, 2068. The rule was introduced by NRB to encourage BFIs to go for the merger and acquisition process so as to strengthen their financial condition. NRB and other stakeholders say that the number of BFIs is far higher than required based on the population, market size and economy. Before the introduction of liberalisation and open-market economy in the 1980s, there were just three banks: Nepal Bank Limited, Rastriya Banijya Bank and Agriculture Development Bank. With this new wave of liberalisation and open-market economy sweeping across the world, one joint-venture bank after the other emerged. After the restoration of multi-party democracy in the country in the 1990s, the establishment of not only BFIs but also other organisations like NGOs and INGOs picked up momentum. At the time, the government did not deem it necessary to analyse the required number of BFIs, their viability and the capacity of the central regulatory authority for monitoring such institutions in a small economy like ours. Lack of foresight at that time has led to this situation, where NRB is finding it difficult to reduce the number of BFIs. In fact, donor institutions like the World Bank and the International Monetary Fund have suggested that NRB should retrench the number of BFIs in the country so that they can be strengthened financially. It is better to have a few strong BFIs than many weak ones with a wobbly position. Last year, NRB announced an incentive package for commercial banks to encourage them to start the process of merger and acquisition. If joint operations were conducted by mid-July of 2020, the deadline for disbursing required loans in agricultural, energy and tourism sectors would be extended till mid-July of 2021, the deadline for adhering to the 4.4 per cent spread rate provision would be extended till mid-July 2021, no permission would have to be taken from NRB to expand branches throughout the country and the cooling period of six months for directors, CEOs and deputy CEOs before joining a financial institution licensed by NRB would be waived. NRB sought commitments from commercial banks for a big merger. And 22 commercial banks submitted their commitments to NRB. And the central bank has also offered similar incentives to banks this time around so as to enthuse them over the merger and acquisition process. As there has been no remarkable progress in this direction, NRB has acted aggressively to effect a forced merger. Although the merger and acquisition process is voluntary, NRB intends that those who have expressed their commitment to go for the merger and acquisition process should complete the process soon. NRB is also planning to seek progress reports from the commitment-making banks as they are dillydallying in completing the process. NRB wants cross-holding BFIs to merge. For this, cross-holding details have been sought from BFIs. NRB wants cross-holding and commitment-making banks to start the merger and acquisition process soon, failing which it may direct such banks to merge forcibly. It may be of pertinence to note that in accordance with Article 177 of the Company Act 2006 and Articles 68 and 69 of BAFIA 2006, NRB is enabled to direct BFIs to go for a forced merger. However, forced merger may reflect NRB's authoritarian attitude towards BFIs. It may erode the credibility of the central regulator. It is also in contravention of the principles of liberalisation and open-market economy. BFIs may take a forced merger as a direct interference of the government in their affairs. When NRB forced commercial banks to raise their capital in 2015, they increased their capital as directed by NRB but by issuing rights shares and other means instead of by going for the merger and acquisition process as desired by NRB. So NRB has now barred BFIs from raising their capital by issuing rights shares.
Benefits The merger and acquisition process has several benefits for BFIs. The financial condition of merged entities will be stronger, there will be a retrenchment in administrative costs, unhealthy competition may be avoided, the capital base will be stronger, managerial efficiency and capability will be enhanced, shareholders' value will increase due to the growth of the market share, operational areas will be expanded, the liquidity crisis can be overcome, bad loans will come down and the profit and productivity will go up, among others. Merger and acquisition are the need of the hour in the present context. Despite NRB's urging BFIs to go for the merger and acquisition process, the desired outcome has not come out yet. So NRB has been forced to effect a forced merger of BFIs, especially commercial banks, whose number should come down to anywhere from fifteen and to eighteen as expected by NRB and other stakeholders.