The Mega Merger

  3 min 52 sec to read
The Mega Merger

The proposed merger between Nepal Investment Bank and Himalayan Bank has attracted quite a lot of attention because of the size of two institutions. Nepal Investment Bank has Rs 27.5 billion in capital, including Rs 16.3 billion in paid-up capital. With this fund, it manages an asset of Rs 238.7 billion, including Rs 165.9 billion in loans and advances. Himalayan Bank, on the other hand, has a capital of Rs 17.1 billion, including Rs 10.7 billion in paid-up capital, and manages an asset of Rs 173.9 billion, including Rs 127.6 billion in loans and advances. The consolidation of the two lenders will lead to creation of a banking behemoth with assets close to 10 percent of the country’s GDP.

Although the two banks are yet to finalise the equity swap ratio – which is most likely to stand at 1:1 – this issue is unlikely to become the bone of contention, as they have signed the memorandum of understanding in mid-May. If everything goes according to plan, the two are looking forward to starting the joint operation before this fiscal year ends in mid-July. One positive aspect about this merger is that was not forced by the central bank, which also regulates the banking sector. Of course, the central bank facilitated this process. But unlike his predecessor, the current central bank governor wants the banks to initiate consolidation process voluntarily. So, the merger that is about to take place has largely been driven by the need to grow business.

Nonetheless, there are those who have expressed genuine concerns about consequences of such a big merger. Not too long ago Nepal saw two big state-owned banks becoming technically insolvent, forcing the government to inject millions of rupees of taxpayers’ money to revive them. This was the result of unnecessary political intervention in day-to-day operations of those banks and presence of a weak banking regulator. That is not the case today. The central bank has a slew of tools in its wherewithal to monitor performance of banks anytime it wants and take necessary actions. Yet failures cannot be completely ruled out, as they may emanate from black swan events like the Covid-19 pandemic. This calls for constant vigilance from the central bank. It must conduct stress tests more frequently to make sure the banks are maintaining adequate buffers to cushion the losses.

Mergers are necessary to scale up businesses, reduce operation cost and enhance productivity. This raises the size of balance sheets and enhances profit, generating better yields for shareholders. But mergers have not been able to generate desired results in Nepal. When the size of a business grows, its production goes up, which lowers the cost of goods and services. But mergers have not been able to reduce the cost of service in Nepal. This means mergers have not been able to raise efficiency. The interest spread – the difference between deposit rate and lending rate – is a major indicator to assess efficiency of banks. The lower the spread the higher the efficiency level, as it shows banks’ ability to offer higher deposit rates while keeping lending rates at the lower level. But interest spreads in Nepal have gone down over the years because of caps introduced by the central bank. This indicates banks are either too greedy or their operation costs are on a higher side.

Merged entities in Nepal have not been able to significantly reduce their operation cost as the central bank has not encouraged job cuts during the consolidation process. Of course, employees cannot be told to quit their jobs without offering an attractive severance package. Kumari Bank recently introduced such a package and employees, including seniors, applied for it. This created a win-win situation for both the management and employees. This must be encouraged in every merger. Attention should also be given to creating a better working culture in merged units. Too often employees of merged entities have complained about senior management staff favouring members of their previous team rather than promoting meritocracy. This hits morale of staff, affecting the institution’s performance This should be avoided at all costs.

The proposed merger between Nepal Investment and Himalayan banks has provided an opportunity to learn about the risks and opportunities of mega mergers. The hope is that it would ultimately help in generation of human resources capable of operating big projects and making banking services efficient, which will benefit businesses and help prop up economic growth. The central bank should provide all the support to make the merger successful.

Madan Lamsal
[email protected]

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