Mergers and acquisitions (M&A) are a business tool for consolidating two or more entities into a single monolithic unit so as to make them strong, efficient and easy to survive. M&A protects a weaker entity from an existential crisis when merged with a stronger entity. M&A has several advantages. It enhances competitiveness, efficiency and profit-making capacity. At the same time, it reduces operating and IT cost, for example.
The concept of M&A emerged in the USA in the 1980s. The importance of this process has been highlighted by the Asian financial crisis of 1997-98 and the global financial crisis of 2007-08. After these crises, banks paid heed to setting up resilient financial systems and enhancing and strengthening risk management capacity. In consequence, regulations on capital increase and M&A of banks and financial institutions (BFIs) were introduced across the world. The waves of M&A have also been felt in the Nepali banking sector.
Nepal’s banking sector was unfledged till the 1980s. At the time, there were only state-owned banks. With the adoption of liberalisation and open market economy policies, banks began to emerge in the private sector. After the restoration of multi-party democracy in the 1990s, the banking sector underwent a sea change; one bank after the other was opened in the country. Despite exponential growth, the banking sector is fraught with problems relating to low turnover, fluctuating interest rates, wide interest rate spread, inefficient management and shortages of funds for big projects.
In order to stem the mushrooming of BFIs, the Nepal Rastra Bank (NRB) introduced the merger bylaws policy in 2011 to enhance the capacity of commercial banks. At the time, it was surmised that foreign banks would enter the Nepali market and that it was not possible for Nepali banks to compete with these banks with the existing capacity. Accordingly, various regulatory provisions such as the Acquisition Bylaw of 2013 were announced. The bylaw was integrated into the Merger and Acquisition Bylaw of 2016.
The monetary policy of 2015-16 made a landmark announcement that the paid-up capital of a commercial bank would have to be increased to Rs. eight billion from Rs. two billion. The NRB also offered incentives and concessions for the merged banks such as relaxation in maintaining the CRR and CCD, enabling them to have additional liquidity, increase lending and expand business. Besides, the merged banks were offered relaxation in sectoral lending targets so that they could focus on profitable sectoral lending rather than meeting regulatory requirements.
The policy announcement of increasing the paid-up capital was intended to indirectly persuade commercial banks to merge. But most banks increased their paid-up capital through the issuance of bonus shares and rights shares. However, the process of M&A is gradually going on. In 2012, there were 32 commercial banks. Now, the number of commercial banks stands at 22. It is gratifying to note that commercial banks have realised the importance of M&A. When there are many financial players in the market, it is natural for unhealthy competition to raise its ugly head. The banks try to attract more and more depositors by offering high rates on interest.
Loans may be disbursed haphazardly in the hope of making huge profits. A huge volume of loans in the unproductive sector may give rise to bad loans. Through M&A, financial intermediation cost can be retrenched; banks can be made strong and efficient; and lending capacity can be enhanced. When it comes to financing big projects, either consortium lending has to be resorted to or foreign aid or grants have to be solicited. When there are banks with enhanced lending capacity, such banks can invest in big projects. Investments in big projects will lead to an increase in national production. M&A also helps in enhancing risk management capacity and decreasing management cost.
It may not be reiterated that the banking sector is one of the most regulated sectors. The NRB is of the view that given the size of the population and the economy, the number of commercial banks is colossal. The country needs just 12 to 15 banks. When there are fewer banks, it will be easier for the NRB to supervise them. Recently, Global IME Bank and Century Bank, Prabhu Bank and Bank of Kathmandu and Nepal Investment Bank and Mega Bank have merged. In the pipeline are Himalayan Bank and Civil Bank and Sunrise Bank and Laxmi Bank. The AGM of Himalayan Bank has approved the acquisition proposal. The NRB has urged Sanima Bank and Machhapuchchhre Bank to merge. Likewise, Siddharth Bank, Prime Bank, Citizens Bank and Everest Bank have also been urged to merge.
The merger policy was pushed by the then governor Chiranjivi Nepal. He introduced the big merger policy with incentives. His successor Maha Prasad Adhikary has also prioritised the merger process. The policy is compatible with international practices that aim at making commercial banks competitive and capable of making huge investments in lending. In a least developed country like ours, funding for big projects is always a problem. When there are 12-13 commercial banks with a huge capital and lending base, the county will not have to look up to donor countries or agencies for mobilisation of funds for big projects. Big projects are required for expanding the economy.
The waves of M&A are now sweeping across the banking sector. The merger policy introduced by the NRB has paid off as more and more commercial banks are showing zeal for M&A. Given the enthusiasm shown by the banks about it, the desired outcomes of the merger policy, i.e., reducing the number of banks as per the size of the population and the economy, will be met soon and the banking sector will have more stability and credibility.
(Maharjan has been regularly writing on contemporary issues for this daily since 2000.)