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)

Seed Fund in Nepal

Literally, seed money is the initial amount of capital required to dream a business. As the name suggests, this type of funding is an early stage investment (until the business is operating at breakeven stage) meant to support to physically initiate the business. This covers funding incurred in the initial stage of business even before conducting the ‘beta test’ i.e. conducting the market research, testing on a prototype, and spending on the operating  expenses.

Seed funding basically can be raised through through angel investing, friends/family funding, crowd funding and donation amount. Angel investors are those investors who listen to the business idea and fund the business on it’s basis. Angels do not have any personal/professional relationship with the funding proposer. They just listen to the idea and shortly judge the person to invest in his idea. The next funding option is the friends/family funding where the relatives and the close acquaintances invest in the idea. In this case, the investors have a close relation with the fund proposer so they know the capability of the person. So, in this category the investment is more dependent in the person and his credibility/trustworthiness than the business idea. Thus, making the business model called as FFF Model; friends, family and fools. Crowdfunding is the option to raise the required capital through the small contribution of many investors.  Crowdfunding does not provides dividend/other privileges to the investors. In fact, investors invest for the story behind the business rather than the expected rate of return.

(Fig: Startup Financing Cycle. Source: Wikipedia)

Seed Funding in Nepal:

Although  seed funding was late to be introduced in 2008 in Nepal, the segment seems to be growing rapidly. Currently, more than four institutions provide seed fund to let the wannabe entrepreneur start his/her business. The key players in this field are:

1. Uddhyami Impact Fund

Uddhyami Impact Fund - a Biruwa Ventures initiative was established in November 2012 with an aim to provide seed fund to the new startups. Organising a month long frequent interaction program, three business ideas are selected for the investment. The impact fund at it’s first phase of investment invests up to the five lakhs. The investment is done on two different basis viz. investment against equity, investment as a loan. Equity comprises of both the cash equity and sweat equity, hence supporting the financially struggling entrepreneurs.

2. Gazaab Social Ventures

In 2011, Gazaab Social Ventures, a micro-social venture capital fund, was launched in Nepal. Each year they organise business plan competition at various parts of the country and invest in the top business ideas. Recently, in 2012, they organised a business plan competition at Kathmandu where there were more than 100 competitors.  The competition was run for five days which at the end identified three business ideas to receive the seed capital upto five lakhs to commence/scale up their business. Gazaab invests the seed fund as a return for equity.

3. Change Fusion Nepal

Change Fusion Nepal  was founded in September 2008 to help local youth direct their vision and skills towards benefiting people and the planet through social entrepreneurship. Change fusion bridges the gap between the investors/donors and the aspiring entrepreneurs by bringing the both parties together and thus enabling the investors to fund the business. They invest the capital looking at the requirement of the business which takes the form of loan. There is no exact range of seed fund amount but they invest upto a couple of lakhs.

4. Youth and Small Enterprises Self Employment Fund (YSEF)

The Youth and Small Enterprises Self Employment Fund (YSEF), an initiative of Government of Nepal, was established to offer self-employment loan and free vocational training to unemployed young people from economically disadvantaged groups in Nepal. YSEF offers various skill-based training related to farming for profit, agricultural industry and service-oriented business. YSEF also provides a seed amount up to Rs. 200,000 as a loan at a low annual interest rate of 12% without any security deposit. YSEF has provided loans to 4206 projects in 37 districts in Nepal.

Despite the lack of proper laws, policies, guidelines, the number of players in this field is increasing. Since, calculation and timely revision of sweat equity is quite difficult, at times, it may invite conflict between the stockholders in the business. The next issue is if someone wants to exit the business and there is no one ready to buy back the business there would be a dilemma in this case. We lack policies and there is no proper mechanism to govern these sort of seed funding/venture capital issues. Introduction of venture capital laws is highly recommended.