Mergers and Acquisitions in Nepalese Banking Sector

Presently, the Nepalese Banking Sector is facing a huge problem and is in critical juncture. So, in order to cope with this problem Nepal Rasta Bank (NRB) has directed the Banking Institutions to go in the process of mergers and acquisitions. NRB has provided several benefits to the merging institutions. Responding to the benefits presented by NRB, the banks and the financial institutions of the country are opting in the process of merger.

Mergers and Acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can aid, finance, or help an enterprise grow rapidly in its sector or location of origin or a new field or new location without creating a subsidiary, other child entity or using a joint venture.

In the present Scenario, there are mainly three reasons that forced the Nepalese Banking Sector to go into the process of M&A.

Liquidity Crunch:

Liquidity refers to the amount of money in the form of cash. The amounts of deposits in bank are very low and the rate of loan recovery rate is also very low. So, liquidity has been a major problem in Nepalese banks. Hence, M&A is believed to solve the liquidity problem as the deposits of the two banking institutions are combined as one.

Capital requirement:

The paid-up capital requirement of the Nepalese bank is currently Rs. 2 Billion. However, the government is planning to raise the paid-up capital requirement from 2 Billion to 5 Billion. It may not be difficult for large banks to meet the requirement set by the government but for the middle and small scaled banks, it may be very hard and sometimes impossible.  So, M&A can be a solution to this requirement.

Open Financial Market:

Nepal’s financial market opened up for international investment on January 2010. One foreign bank has already applied to start operation. If foreign banks do enter Nepal, it concerns about the capacity of local banks to compete with its foreign counterparts. Hence, M&A will minimize costs, increase the economies of scale, and increase institution's capacity, thus being able to compete at international level.

Although there are several advantages of mergers and acquisitions, and Nepalese banks are interested in this process, they may not be fruitful in all the case. Study by Wharton, Harvard, and Morgan has shown that Merger and Acquisition around the world have a failure rate of 50%-70%. And in the case of Nepalese banking industry, in last seven years, Success rate of merger is 15%. In addition, Nepalese banking sector lacks sufficient corporate experience in mergers and acquisitions. Merger and Acquisition do not always lead to success or always failure. Impact of M&A depends upon how well the vision, mission and objective of two organizations are well integrated. Moreover, it depends on how effective the management is and how the stakeholders perceive the M&A decision. So, the M&A of any business organization should be carried out with sufficient homework. So, before undergoing a process of merger, it is very crucial to be determined for merger expansion strategy to be undertaken. Otherwise, it may jeopardize the present situation and even worsen the condition of Nepalese Banks.

We can not blindly agree that the Nepalese Banking Sector problem will be best addressed by the M&A strategy. The government should just not rely on mergers and acquisitions for addressing the problem of banking sector. Rather, it should bring appropriate fiscal policies and monetary policies to settle the problem.  Spending of the budget at the final months of fiscal year reduces the flow of money in the market. The government should introduce deficit budget financing and spend the allocated budget at the current time, so that the velocity of money circulation will increase, and the liquidity problem will be addressed. Government should encourage the investments in the productive sectors. Investments in productive sector increase the value of the capital and hence, increase the chances of repayment of loan. Finally, not relying solely in the merger and acquisition, the government should provide additional benefits to encourage Joint Venture, Licensing, Franchising, etc. as they hinder the direct foreign investment and strengthen the condition of Nepalese banks to compete with international banks.

(As Published on October 2012 Issue of BOSS- A monthly business magazine of Nepal)

Foreign Direct Investment in Poultry Sector in Nepal

Government has initiated the process for opening the poultry sector for foreign direct investment which was banned along with the other 23 sector sectors by the Foreign Investment and Technology Transfer Act 1992 (link).

As per the directive of Industry Promotion Board, Ministry of Industry has prepared the proposal which was tabled at the Cabinet meeting. The ministry proposal plans to allow foreign companies to invest in joint-venture model, keeping the upper bar 75 percent for the foreign company. In addition to it, to enter into the poultry sector, foreign company are required to invest Rs. 500 Million and at least grow 200,000 chicken in a lot.

Although the entry of foreign business giant may affect on the local poultry farmers competing capacity, the new business can bring out improved breed, modern technology, generate greater employment opportunities, open up more space for the feed manufacturers, push the meat processing market and all.

Fishery Insurance Policy Introduced in Nepal

Soon after the introduction of crops, poultry and livestock insurance, the Insurance Board has now introduced the fishery sector insurance policy. The Insurance Board makes it mandatory for the non-life insurance companies to introduce scheme on fishery insurance.

For buying the policies, the fish farm should be done in at least 200 sq. m. and 3 feet depth, except in the case of trout farming which has separate technical requirements.

The farmers can buy insurance policy by paying not more than two percent of the sum assured as premium amount, which is set as a higher limit bar for the insuring companies. But if fishes are grown adopting a highly intensive fish farming technology, a 10 percent discount will have to be given on the premium amount.



The insurance policy covers the loss from from fire, lightning, earthquake, floods, drought, typhoon, hailstorm, diseases, lack of oxygen, excess use of ammonia or use of poisonous substances, among others.

Compensation will be given to farmers based on product or production value. This means insurance coverage will be provided based on market value of fully grown fishes or cost incurred in rearing fishes till the time of their harvest. (This is unlike in the case of crops, livestock and poultry insurance (LinK) in which coverage is provided on cost incurred in growing products till the time of their harvest.) A compensation of 90 percent of sum assured will be given by insurers in the above mentioned loss reasons.

However, insurance companies does not compensates the claims on losses caused by carelessness or overcrowding of fishes in ponds, and if fishes have to be destroyed on government instruction.

New Vegetable Market in Shantinagar-Kathmandu

A breakthrough has been made in the monopoly of Kalimati Fruits and Vegetable markets through the initiation of private sector led alternative market development at Shantinagar.

Five partners have started the project with an initial investment of Rs. 5.3 million (53 lakhs) in 3 ropanis and plan to extend the market in 2 more Ropanis. Along with vegetables and fruits, the markets will sell food commodities, spices, meat and fish products, products of Dairy Development Corporation, organic vegetables and fruits, and cooking gas directly from the farmers. The market opens from 5.30 in the morning till 8.30 in the evening.

This may not be a panacea to the middlemen involvement  in the agricultural sector but this private sector  intervention with price competition in the market is  showing a way of hope to the end farmers by  introducing competition to end the state owned three decades of Agrimarket  Monopoly. 

Handmade Paper Production Process

Nepalese Handmade Lokta paper is made with from the barks of the wild grown shrub (Daphne Bholuwa and Daphne Papyracea) that is grown at most coniferous forests in Nepal at an altitude of 2000m to 4000m.

 Lokta paper is known for its durability and inherent resistance to insects. The lokta fiber is possibly one of the longest and strongest natural fibers in Nepal. Thus, paper made from lokta fiber is very strong. The uneven distribution and length of fibers gives lokta paper a unique texture. Most papers dissolve when put into colour solutions; lokta paper does not Therefore, lokta paper can be dyed using the dip dyeing process. The flexibility of this process gives enormous possibility for designs and colours in lokta paper.

Making paper from lokta barks constitutes manual and indigenous process. 

1. The collectors peel the raw bark from the lokta bush in the forest and dry it in the sun to reduce the weight. 
2. The dried bark is carried to the village by porters where paper is produced. 
3. The lokta is immersed in water to soften and it is cleaned to remove the black spots and impurities. Lokta soaking operation is usually done at night to save  the time. 
4. The cleaned lokta is cooked in a 100 litre drum in a mixture of water and caustic soda. The cooked lokta is washed with clean water to remove the caustic soda. 
5. The clean lokta is then beaten with a wooden mallet to make it into pulp. (In some villages where electricity is available they are using mechanical beater now a days.)
6.  The softened pulp is then moulded in 20 inch x 30 inch wooden frames by spreading the thin pulp (with a proper mix of  water and pulp) to make flat sheets of paper. 
7. The frames are dried in the sun, after which the paper is taken out of the frame.and the lokta paper sheet is ready.

Problems of Acquaculture in Nepal

Fishery in Nepal- A Glimpse:

An estimated 79,000 people are directly or indirectly involved in pond aquaculture activities nationally and the number is increasing. The fisheries and aquaculture sector in Nepal is under development and is one of the priority areas for the Ministry of Agriculture and Cooperatives and is gaining priority from the government. 21 Terai based districts have been declared as fish producing districts and each district has been assigned Fisheries Development Officers.

Overall Scenario:

Fish productivity in Nepal is 3.7MT/ha which is about the same as the regional average (India 3.9, Bangladesh 3.9). But, there are also lots of instances within Nepal where farmers are regularly averaging 10 MT/ha without the increase in capital expenditure. Low productivity is attributable to poor quality fish stock (seed), use of feed and poor pond management.

Fish farmers in Nepal feed the fish irregularly and do not use appropriate feed material hence locally produced table fish is well under-sized in comparison to imported fish from India. Imported fish tends to be 1 kg on average as compared to locally produced fish that is 200-300 gm.

Market Players in this sector:

Different kinds of market players are active in fishery sector; both at market and support roles. At the supporting roles, primarily government and Membership Based Organizations (MBOs) such as Fishery Association of Nepal (FAN) and Chamber of Commerce and Industries exists. Market players such as private hatcheries, nurseries and hawkers are observed in the fish seed businesses. Limited number of feed manufacturers such as Annnapurna Agro Feed and Himalayan Aqua Agritech and local suppliers exist in fish feed market.

Fish Seed supply-chain:

Fish seed can reach to the farmers directly through the hatcheries, through the middlemen hawkers and through the fisheries. Private hatcheries are the main suppliers of fish seed, supplying more than 80% of the total hatchlings, frys and fingerlings. They supply to the nurseries and also supply directly to the farmers. In the case of nurseries; they buy hatchling and/or fry from the hatcheries and raise them for a couple of weeks, make them 2-3 inches long and sell to the farmers. Farmers close to the hatcheries usually buy either from the hatcheries or buy through the hawkers whereas those who are away from hatcheries, buy fingerlings from the nearby nurseries.

Lease Policy is another hurdle:

Pond fish culture currently produces over fifty per cent of total fish consumed in Nepal (capture fisheries production and imported fish accounts for the remainder). An important factor affecting productivity in this segment is the Public Pond Leasing Policy. VDCs and Schools control and lease all the public ponds for about 3-5 years. Farmers wishing to start fish production are hesitant to make an investment in their ponds because there is no guarantee that they will be able to lease the pond again once the first leasing period is over. Majority of the people leasing ponds, under this arrangement, are small-scale farmers who make monthly installments on the lease. According to traders, many farmers pull out fish from their ponds before they reach their full size in order to make these monthly payments.

In a nutshell, low productivity is caused by improper pond management practices, the use of low-quality fish seed and inappropriate feed, lack of technical knowledge and information among farmers, and a fragmented production base inhibiting farmers’ access to sales and supply markets. This sector can be commercialised through the market intervention and policy level initiatives at the above mentioned constraints.