Thinking of linking: Mergers on the rise in Nepali banking sector
KATHMANDU, JUL 18 -
When Nepal Rastra Bank (NRB) introduced the Merger Bylaws in May 2011, many doubted whether Nepali banks and financial institutions (BFIs) would go for mergers as the concept was a relatively new thing for the country. However, soon after the bylaws were issued, Birgunj Finance and Himchuli Bikas Bank got the go-ahead from the central bank to merge and became H&B Development Bank.
Four other couples of banks and financial institutions combined while Global Bank and two other financial institutions merged to become a single entity last year. Three other couples of financial institutions are in the process of getting the final approval from the central bank.
Likewise, two couples of financial institutions plus three other financial institutions have obtained letters of intent (LoI) from the central bank to come together. Six other couples of BFIs have applied to the central bank to merge, according to NRB. Most of the BFIs have got their proposed merger endorsed by their annual general meeting (AGM). “Our assessment is that the number of mergers that took place last year is a big success,” said Bhaskarmani Gnawali, spokesperson of NRB. “It is not only a success of NRB’s merger policy but also the need of the hour.”
According to him, BFIs proliferated due to the liberal NRB policy in the past and invited unhealthy competition. “Competit-ion increased the cost of BFIs while their profits slumped which would be unsustainable in the long run,” said Gnawali.
Given that many BFIs are yet to fulfil their paid-up capital requirement which they have to do by the end of the fiscal year, they had to choose merger as an appropriate option for increasing the capital base. Particularly, development banks and finance companies are struggling to increase their paid-up capital. “As there is no environment for increasing the capital by issuing rights shares and issuing bonus shares will not be enough to raise the capital to the required level, finance companies have no other option than going for merger,” said Rajendra Man Shakya, president of the Finance Companies’ Association of Nepal. Shakya’s CMB Finance is in the process of merging with Alpic Everest Finance and Butwal Finance. “Many finance companies have thought it better to opt for a merger than to face action by the central bank for failing to increase the capital to the required level next year.”
They have to increase the capital to Rs 200 million by mid-July 2013.
Given the shaken public confidence towards banking institutions due to recent problems in the banking sector and their inability to give proper returns to their shareholders, BFIs are increasingly leaning towards consolidation. “In such a situation, there is hardly any possibility of increasing the paid-up capital by issuing rights shares,” said Shakya. He added that as the size of loans being demanded by single buyers has been increasing in recent years, finance companies having the minimum paid-up capital of Rs 200 million cannot fulfil their requirement. “That’s why it has become essential even for finance companies that have fulfilled the capital requirement to go for mergers,” said Shakya.
Although most of the FIs that have chosen to merge are development banks and finance companies, commercial banks are also jumping on the bandwagon. There has been no case of two banks combining, but commercial banks and finance companies have merged. Machhapuchchhre Bank and Standard Finance merged recently. Likewise, Global Bank, IME Financial Institution and Lord Buddha Finance also came together.
Recently, two commercial banks, NIC Bank and Bank of Asia, signed a memorandum of understanding to merge. Following NRB’s pressure on BFIs promoted by the same group to merge, NIC and the Bank of Asia which were promoted by the same group, have decided to go for a merger.
NIC CEO Sashin Joshi said consolidation is becoming increasingly necessary as banks are struggling to give returns to their shareholders. Looking at last year’s experience, both NRB and bankers are hopeful that mergers will be the phenomenon in the new fiscal year that began on Monday. “Almost all BFIs are eyeing merger, and the number of BFIs will come down notably in the next three years,” said Gnawali.
However, bankers said more incentives are needed to speed up mergers, particularly between commercial banks. They have long been demanding a decrease in corporate income tax to 20 percent from the current 30 percent for BFIs going for a merger. “The government had assured us about reducing the tax through the new full budget,” said Joshi. “Unfortunately, a full budget could not be brought.”
He predicted at least two to three couples of commercial banks would merge in the new fiscal year if the government provides tax incentives.
Mergers in 2011-12
BFIs Receiving Final Approval
Himchuli Dev Bank & Birgunj Finance
Kasthamandap Dev Bank & Shikhar Finance
Business Dev Bank & Universal Finance
Nepal Bangladesh Bank & Nepal-Sri Lanka Merchant Bank
Machhapuchchhre Bank & Standard Finance
Global Bank & IME Financial Institution & Lord Buddha Finance
Infrastructure Dev Bank & Swostik Finance
Annapurna Finance & Suryadarshan Finance
Pashupati Dev Bank & Udyam Dev Bank
LoI Received
Alpic Everest Finance & Butwal Finance & CMB Finance
Vibor Dev Bank & Bhajuratna Finance
Premier Finance & Imperial Finance
In Pipeline
Araniko Dev Bank & Surya Dev Bank
Shine Dev Bank & Resunga Dev Bank
Social Dev Bank & Corporate Dev Bank
Kathmandu Finance & Civil Merchant Finance
NIC Bank & Bank of Asia
Prudential Finance & Gorkha Finance
Source: The Kathmandu Post
