To merge or not to merge
KATHMANDU, MAY 16 -
The recent introduction of merger bylaws for banks and financial institutions (BFI) by Nepal Rastra Bank (NRB) has paved the way for mergers and acquisitions among Nepali BFIs. While there have been a few cases of mergers among Nepali BFIs even during the absence of any pertinent guidelines, the introduction of merger bylaws has streamlined and institutionalized the mechanism for inorganic growth among Nepali BFIs. Moreover, in the context of the argument that there are too many BFIs in Nepal, the bylaws have provided certain incentives for financial institutions wanting to come together and opened up the avenue for consolidation in the overcrowded Nepali financial sector.
The merger bylaws have come at a time when the Nepali banking sector is facing certain problems. The liquidity crunch, which has engulfed the banking sector for more than one and half years, shows no signs of abating. In fact, it appears to have become more pervasive. The negligible growth in the deposit base of commercial banks concomitant with their spiralling cost of funds is testament to this. On the assets side of their balance sheet, BFIs are facing problems due to their heavy exposure to the real estate sector. Recent financial results show that the rising cost of funds coupled with higher provisioning for real estate loans have started to undermine the profitability of BFIs.
Outside of the balance sheet and profit and loss statements, the recent episodes of malpractices in a few notable financial institutions have dented the public’s confidence in the banking system in general. While politics generally dominates the discussion when a group of Nepalis come together, the notoriety of the cases involving Nepal Share Market Finance and Gurkha Development Bank has induced the public to discuss extensively where they deposit their savings.
While the liquidity crisis and problems in the real estate sector affect the entire economy, the issue of corporate governance is a more symbolic one and puts a question mark over how banks and financial institutions are being run. While the promoters and management of the troubled financial institutions are largely at fault, these regular cases of malpractices do support the argument that the financial sector is overcrowded in Nepal; and that the regulatory body, NRB, has not been able to cope with the growth in the number financial institutions.
Given such a challenging market scenario and corporate governance issues, the merger bylaws, with all their incentives, have opened the way for consolidation among BFIs. And it appears that this is what NRB is hoping for. The central bank, which has been stretched to its supervisory limit, would ideally want more and more BFIs to merge so that it would be better able to supervise the remaining fewer financial institutions. The questions that arise are: Do the incentives provided by NRB align with the incentives of the promoters of BFIs as they have to align for mergers to happen? And more importantly, is the rationale of NRB a proper or economic one?
Due to the liberal licensing policy adopted by NRB, there was a tremendous surge in the number of BFIs from 2004 to 2009. People from different walks of life started opening financial institutions; and the reason behind this surge does not have to do with the desire to have some form of equity ownership in BFIs, as this can be easily done by buying public shares. It has to do with having a controlling interest in the BFI to enable them to dictate their modus operandi and earn money through ulterior means. The recent episodes of malpractices also support this argument. Given that background, it is hard to fathom why these individuals with a controlling interest would want their BFIs to merge with another and have a diluted stake in the merged entity. Despite all the incentives provided by NRB, they don’t add up to overcome the vested interests of promoters. And this is one reason why the idea of ‘forceful’ merger incorporated in the bylaws could actually be a good one.
Now to get to the part of whether NRB’s rationale for mergers, through the bylaws, is an economic or proper one, one needs to understand why organizations merge and whether a merger adds value. Mergers and acquisitions are a means through which BFIs, or for that matter any organization, can rapidly expand its clientele base, revenue sources, geographic presence and, more importantly, the size of its balance sheet. This kind of inorganic growth strategy can also enable BFIs to take advantage of synergistic opportunities available through economies of scale and/or scope. However, in the context of Nepal, given that most BFIs operate in the same geographic region, have similar products and services and serve similar clients, there are few, if any, opportunities for synergies. Having said that, mergers do provide opportunities to cut costs and bring operational efficiency.
Source: Kantipur
The recent introduction of merger bylaws for banks and financial institutions (BFI) by Nepal Rastra Bank (NRB) has paved the way for mergers and acquisitions among Nepali BFIs. While there have been a few cases of mergers among Nepali BFIs even during the absence of any pertinent guidelines, the introduction of merger bylaws has streamlined and institutionalized the mechanism for inorganic growth among Nepali BFIs. Moreover, in the context of the argument that there are too many BFIs in Nepal, the bylaws have provided certain incentives for financial institutions wanting to come together and opened up the avenue for consolidation in the overcrowded Nepali financial sector.
The merger bylaws have come at a time when the Nepali banking sector is facing certain problems. The liquidity crunch, which has engulfed the banking sector for more than one and half years, shows no signs of abating. In fact, it appears to have become more pervasive. The negligible growth in the deposit base of commercial banks concomitant with their spiralling cost of funds is testament to this. On the assets side of their balance sheet, BFIs are facing problems due to their heavy exposure to the real estate sector. Recent financial results show that the rising cost of funds coupled with higher provisioning for real estate loans have started to undermine the profitability of BFIs.
Outside of the balance sheet and profit and loss statements, the recent episodes of malpractices in a few notable financial institutions have dented the public’s confidence in the banking system in general. While politics generally dominates the discussion when a group of Nepalis come together, the notoriety of the cases involving Nepal Share Market Finance and Gurkha Development Bank has induced the public to discuss extensively where they deposit their savings.
While the liquidity crisis and problems in the real estate sector affect the entire economy, the issue of corporate governance is a more symbolic one and puts a question mark over how banks and financial institutions are being run. While the promoters and management of the troubled financial institutions are largely at fault, these regular cases of malpractices do support the argument that the financial sector is overcrowded in Nepal; and that the regulatory body, NRB, has not been able to cope with the growth in the number financial institutions.
Given such a challenging market scenario and corporate governance issues, the merger bylaws, with all their incentives, have opened the way for consolidation among BFIs. And it appears that this is what NRB is hoping for. The central bank, which has been stretched to its supervisory limit, would ideally want more and more BFIs to merge so that it would be better able to supervise the remaining fewer financial institutions. The questions that arise are: Do the incentives provided by NRB align with the incentives of the promoters of BFIs as they have to align for mergers to happen? And more importantly, is the rationale of NRB a proper or economic one?
Due to the liberal licensing policy adopted by NRB, there was a tremendous surge in the number of BFIs from 2004 to 2009. People from different walks of life started opening financial institutions; and the reason behind this surge does not have to do with the desire to have some form of equity ownership in BFIs, as this can be easily done by buying public shares. It has to do with having a controlling interest in the BFI to enable them to dictate their modus operandi and earn money through ulterior means. The recent episodes of malpractices also support this argument. Given that background, it is hard to fathom why these individuals with a controlling interest would want their BFIs to merge with another and have a diluted stake in the merged entity. Despite all the incentives provided by NRB, they don’t add up to overcome the vested interests of promoters. And this is one reason why the idea of ‘forceful’ merger incorporated in the bylaws could actually be a good one.
Now to get to the part of whether NRB’s rationale for mergers, through the bylaws, is an economic or proper one, one needs to understand why organizations merge and whether a merger adds value. Mergers and acquisitions are a means through which BFIs, or for that matter any organization, can rapidly expand its clientele base, revenue sources, geographic presence and, more importantly, the size of its balance sheet. This kind of inorganic growth strategy can also enable BFIs to take advantage of synergistic opportunities available through economies of scale and/or scope. However, in the context of Nepal, given that most BFIs operate in the same geographic region, have similar products and services and serve similar clients, there are few, if any, opportunities for synergies. Having said that, mergers do provide opportunities to cut costs and bring operational efficiency.
Source: Kantipur
