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)