Central bank mulling forced merger policy
KATHMANDU, AUG 02 -
The central bank has been mulling adopting a forced merger policy with a majority of banks and financial institutions (BFIs) showing reluctance to combine. According to a senior official of Nepal Rastra Bank (NRB), it is yet to finalise a concrete model under which it will pressure BFIs to merge, but it has created a broad outline of possible actions.
NRB deputy governor Maha Prasad Adhikari said that they had identified three conditions based on which the central bank can force BFIs to go for a merger. As per the first condition, BFIs operated by the same business group or family will be directed to amalgamate. “The central bank will order the BFIs to merge if representatives of the same group or family are operating them,” said Adhikari.
The Merger Bylaws unveiled by NRB in May 2011 also state that the central bank can persuade BFIs to merge if they are owned by a single group of family. Since then, the central bank has been urging BFIs promoted by the same group to merge but without much success. So far, only NIC Bank and the Bank of Asia Nepal with nine common promoters have signed a memorandum of understanding to combine.
The bankers have expressed reservations over a number of issues related to forced mergers. “NRB should be more clear regarding the definition of ‘same group’ and relate it to the time when the BFIs were issued operating licences,” said Sashin Joshi, CEO of NIC Bank. “Also, NRB should be practical if it is planning to issue directives, and ample time should be given to the BFIs.”
Similarly, under the second condition, the central bank will persuade BFIs to go for a merger if there is a shortfall of capital. As per NRB regulations, banks are required to maintain a minimum capital adequacy ratio (CAR) of 10 percent and financial institutions a CAR of 11 percent. CAR is the measure of a bank’s capital expressed as a percentage of its risk weighted credit exposure.
“If BFIs fail to maintain the minimum CAR, the central bank will force them to merge which will help them increase it,” said Adhikari.
A stress test of commercial banks carried out by NRB at the end of the third quarter of the last fiscal year had found that even commercial banks were vulnerable to credit risk.
Joshi said that if the minimum CAR is not met, something must be done and that forced mergers under such conditions would not be controversial.
Likewise, the third condition is related to prolonged poor financial health and bad governance of BFIs. “We will force BFIs to merge if they fail to improve their financial and install good governance,” said Adhikari. “However, we will provide them sufficient time to improve themselves before forcing them to combine.”
Apart from governance, the central bank will look at the non-performing asset level, portfolio and deposit mix of BFIs before imposing this condition. Meanwhile, bankers have asked the central bank to elaborate on corporate governance. “Corporate governance is a vague issue, and NRB should be very clear so that there will be no controversy,” said Joshi.
The Nepal Bankers’ Association (NBA) has welcomed the central bank’s plan. “Such a strategy is very crucial for the better financial system of the country,” said Ashoke Rana, president of the NBA. “The number of BFIs is very high compared to the size of our economy, and we have long been demanding such a strategy from the regulators.”
Adhikari would not disclose when NRB would bring out the mandatory merger directive saying that it was being prepared. However, another NRB official said that it would be issued after the mid-term review of the monetary policy. “Currently, we are busy studying the voluntary merger proposals from BFIs,” he said. “Also, it would not be good to force them to merge when they are showing willingness to do it on their own.”
Source: The Kathmandu Post
