As the central bank remains adamant on bank mergers, the Nepali-banking sector is moving towards yet another critical juncture. BFIs simply cannot ignore the latest policy directives but they seem to be reluctant to go for mergers, which raises the question whether the latest consolidation drive will be a success.
--BY SANJEEV SHARMA
In what looked like students being summoned into the headmaster’s office for a caning, Nepal Rastra Bank (NRB) on June 27 invited chairmen and CEOs of banks and financial institutions to Hotel Yak and Yeti, a five-star property in downtown Kathmandu, where Governor Dr Chiranjibi Nepal directed them to come up with concrete proposals on mergers and acquisitions (M&As) before the announcement of the new Monetary Policy.
While talk about the central bank strongly pushing for mergers was doing the rounds in the corridors of the central bank, the assertive way in which the central bank senior officials including Governor Nepal talked during the Yak & Yeti meeting surprised many. The message was clear, go for consolidation voluntarily or the central bank will force BFI’s to merge.
While, many saw this as the last major policy push by Governor Nepal whose tenure is ending in Mid-March 2020, the latest consolidation push is in line with the current fiscal year budget that said, 'large banks and financial institutions would be encouraged to merge.'
With the central bank's latest merger push, the Nepali-banking sector has moved to yet another critical juncture. With both the Finance Ministry and central bank on the same page, BFIs simply cannot defy the latest policy directives despite their grievances.
Despite their discomfort for mergers, BFIs did honour NRB's instruction and submitted their M&A commitments. As of July-end, 20 commercial banks and three development banks have forwarded their merger commitments to the central bank.
Immediately after the central bank instruction, two banks – Global IME Bank and Janata Bank – announced their merger and inked a memorandum of understanding (MoU) on July 5.
As per the MoU, the merged entity will continue as Global IME and Parshuram Kunwar Chhetri, Janata Bank CEO will lead the bank. Post merger, it will be one of the largest commercial banks in Nepal with a capital base (paid-up capital) of Rs 17.11 billion and estimated total deposits of Rs 190-200 billion, loans and advances of Rs 170-172 billion.
Chhetri terms the union between these two banks as an ‘ice breaker’ for the latest round of banking consolidations. Chhetri, who is a staunch supporter of the ‘big merger’ drive, believes that the merger between Janata and Global IME will create a synergy effect and force other banks to follow suit.
According to him, both institutions have many similar characteristics and are run by like-minded individuals and these factors drove both banks into merging. “Janata Bank itself is a combination of seven banks and financial institutions. Similarly, Global IME is another leading bank in terms of M&A and capital increment," he said.
The discourse on ‘big mergers’ began to surface as some bankers and experts publicly began to argue in favour of having banks with large financial bases to ensure the stability of the country’s financial sector and to ready banks to face future challenges. Basically, their comments came in the wake of the deteriorating situation created by the shortage of investible funds in the financial sector.
Meanwhile, the governor and NRB officials increasingly began to raise their voices in favour of ‘big mergers’. Initially, finance minister Dr Khatiwada was seen as being skeptical to the idea of having large banks in the country. He was of the view that there was a need for comprehensive homework before mega banking entities are formed as the failure of a single large bank can have disastrous consequences to the country’s economy.
Big Questions on ‘Big Mergers’
One of the major issues of the ‘big merger’ is the risk of large banks failing in case things go wrong in such institutions. The failure of two large government banks, Nepal Bank Limited and Rastriya Banijya Bank in the past is one prime example of big banks failing. The government had to request the World Bank to bail them out and it took almost 15 years to turn them around.
Central bank officials maintain that post-merger the performance of banks will improve significantly but many do not buy this argument.
Former banker Sashin Joshi termed the latest consolidation drive as a half-baked approach. "The central bank is either itself not clear or unable to clarify others why consolidation is needed at this moment," he said. "There is no clarity whether this (merger) will increase access to finance and improve financial stability."
According to Joshi, the necessity for mergers arise for three reasons - to transform market share, to increase shareholders value and to ensure survival when a bank is in big trouble. "When your organic growth is not good enough to make a transformation in your market share, then mergers could be one of the options for capturing a larger market share," he said. "The necessity for mergers arise when the bank is in big trouble and does not have the capacity to raise capital to keep it afloat. Then, the best way to ensure survival is to merge with a strong institution."
However, Deputy Governor Siwakoti believes post-merger, banks will be bigger and stronger in terms of capital base and human resource to create a synergy effect. "It will also help them to scale up their business,” he said. Janata Bank CEO Chhetri agrees with Siwakoti. “It takes time for the big banks to fail while small institutions are much more vulnerable to several risk factors. In our context, many small BFIs became problematic and the central bank had to come to their rescue in the past,” he opines, adding that big banks will be closely monitored by the regulator as well as the market.
However, Sanima Bank CEO Dahal holds a different view.
“It is not that banks will perform better when they increase in size. Success or failure is relative to the quality of their services and business,” he said. According to him, for a bank to succeed, the board of directors (BoD) and the management need to work accordingly. “It also depends on the actions of the central bank too. NRB visits banks for inspection on a regular basis. The central bank should ensure that banks don’t fail,” said Dahal.
But, there are other issues as well. Critics have already questioned NRB's capacity to regulate the big banks post-merger. As most of the banks' promoters are big industrialists and politically well-connected, will the NRB be able to tame them in case they start defying the regulator? That, in itself, is a billion dollar question. In the recent past also, the central bank had to backtrack many decisions regarding corporate governance following intense lobbying from promoters. NRB officials argue that having less BFIs will be easier to regulate. But the central bank is yet to make it clear how a lower number of BFIs will add to the effectiveness in its role as a supervisory and monitoring body.
Experts see weak regulatory and supervisory capabilities of the central bank as one of the factors fostering problems related to corporate governance, lending, and competition among banks.
“The central bank faces big question marks over its monitoring and supervision capabilities,” said Deependra Bahadur Kshetry, former NRB governor. He adds that NRB has inadequate human resource and advanced technologies to ensure BFIs are effectively monitored and supervised.
A Change in Tone?
Given the assertiveness shown by the central bank of late, BFIs' promoters feared the worst when it came to the monetary policy for 2019/20 announcing the forced merger rule.
However, it was also surprising to see the central bank softening its tone of ‘forced’ to ‘voluntary’ merger in the new monetary policy, giving some respite to promoters.
The regulator, NRB said their policy, as of now, is of encouraging banks to go for mergers voluntarily. The incentives that the monetary policy brought was part of that strategy, it said. “We want the banks to merge voluntarily and more incentives can be added if required," said Deputy Governor Chintamani Siwakoti.
But many say that the central bank will eventually go for forced mergers sooner or later. They pointed out that the central bank in a clandestine way has incorporated its ‘forced merger’ approach in the new monetary policy. It has prioritised M&As between BFIs that have cross holding investments of the same promoters. “Necessary arrangements will be made to prioritise mergers and acquisitions of BFIs that have shareholders who own shares of more than a certain percentage in more than one bank and financial institution,” reads the monetary policy.
Deputy Governor Siwakoti too hinted at the same thing when he talked with New Business Age. "If they (banks) still don’t comply with our instructions, then we will have to resort to introducing a forced merger policy,” he said, adding that the NRB can introduce new regulations regarding mergers during the mid-term review of the monetary policy.
Not so attractive incentives
With the central bank strongly pushing banks for consolidation, the Nepali banking sector is about to enter into a new phase of transition. And, there are several pertinent issues to be resolved before hand to ensure that this transition remains smooth. At this moment, it is difficult to speculate how banks will move forward for mergers. Now, the onus lies on the central bank to convince stakeholders that they will be backed by policy support. Once such pre-requisite is incentives, which the new monetary policy did announce.
As promised before, the central bank did announce a series of incentives for the commercial banks, to entice them to merge. The monetary policy extended the deadline for banks for priority sector lending, debenture issuance, maintaining a 4.4 percent interest rate spread. It also removed the mandatory cooling period of six months for directors, CEOs and Deputy CEOs and mandatory branch expansion approval from the central bank under a condition that their mergers are concluded by mid-July 2020.
However, the incentives offered by the NRB through the monetary policy have received a lukewarm response from the bankers who said they do not see the announcement as much of an encouragement to go into M&As.
Former banker Joshi said the incentives offered by the central bank are not that big. "I don't think it will work," he said.
Sanima Bank CEO Bhuvan Dahal believes it would have been better if the central bank could have offered somewhat more than what the monetary policy has offered. “I think the incentives are not in line with our expectations. Hence, a natural M&A for other reasons may happen but banks may not expedite it just due to the recently announced incentives,” he said.
According to him, the world over, M&As take place without any incentive from the governments and are carried out by two or more institutions where they see a synergy effect. “In other words, it should help increase level of returns of banks. In Nepal, we are talking about incentives because it is the policy correction by NRB,” mentioned Dahal.
Will the number decline?
Except for the Global IME and Janata merger announcement, there have not been noticeable merger moves by the other banks. As of now, big commercial banks that include Nabil Bank, Nepal Investment Bank, Himalayan Bank, Everest Bank, Standard Chartered Bank are yet to open their strategy over mergers.
Instead, commercial banks have started to acquire class 'B' and 'C' institutions, just to honour the central bank’s instruction. This has raised questions whether the central bank's plan of limiting the number of commercial banks to 14-15 will succeed or not.
According to promoters and executives of banks, mergers are a very serious and sensitive matter that should not be forced, and they want to avoid such undertakings in haste. One such individual is Moti Lal Dugar, chairperson of Sunrise Bank, who is a critic of the forced merger policy.
He describes the central bank’s push to merge two different banks as a forced mismarriage. “Forcing banks to find partners to merge will lead to a mismarriage between the institutions. It is because there might be several differences between the merging institutions such as management style and work culture, among others. Therefore, it is reasonable if a bank want to merge voluntarily, otherwise, a forced merger is not necessary,” said Dugar.
Banking sector insiders observe the slim possibility for a merger between the three state-owned banks, namely Rastriya Banijya Bank, Agriculture Development Bank and Nepal Bank. It is also highly unlikely that banks operating in the country as foreign joint ventures including Nabil Bank, Nepal SBI Bank, Standard Chartered Bank Nepal, Everest Bank, NMB Bank, NB Bank and Himalayan Bank are will go into mergers anytime soon. However, they can acquire small financial institutions if necessary. In the meantime, banks such as NIC Asia, Prabhu, Nepal Investment Bank, Sanima, Siddhartha, Citizens International and Prime Commercial are also looking for partners for acquisition as recent comments of their CEOs and promoters indicate that they have their own unique identity and they do not want to lose their peculiarities by merging.
It seems that the central bank wants to merge Machhapuchchhre, NCC, Bank of Kathmandu, Civil Bank, Mega Bank, Century Commercial and Kumari Bank into other big banks. According to a source close to the matter, the central bank sees these banks as financially weaker with problems in the area of corporate governance.
How relevant is the Malaysian Model?
The Malaysian model of banking consolidation is often cited by the proponents of the ‘big merger’. However, the applicability of this particular model is not clear in the context of Nepal. Malaysia, one of the Tiger Cub economies of Asia, during the late 1990s underwent a crisis, also known as the 1997 Asian Financial Crisis, which swept through most of South East Asia. The crisis started in Thailand in mid-1997 and spread throughout the ASEAN region. The phenomenon was caused by the overheating of major economies in the region as a result of the credit bubble.
In response to the spiraling crisis, the Malaysian government initiated the consolidation and rationalisation of the country’s banking sector which was mostly fragmented with banks engaged in unhealthy competition to get a slice of the country’s financial market pie. In a bid to save and restructure the collapsing banking industry, Bank Negara Malaysia (BNM), the Malaysian central banking authority, through strict capital control and forced mergers, reduced the number of banks from 71 to 24 (in six groups) from 1999 to 2000. Similarly, a critical phase of banking consolidation concluded in 2002 after the formation of 10 anchor banks, which was a result of M&As of several BFIs across the country. At present, nine local and 20 foreign banks operate in Malaysia.
Experts cast doubts on the applicability of the Malaysian consolidation model in Nepal. “Unlike Malaysia in the late 1990s, Nepal today faces different types of economic difficulties. We have several challenges on the external front,” said former NRB governor Kshetry. According to him, the priority of Nepal Rastra Bank should be on supporting the steps taken by the government to narrow the trade deficit and current account deficit rather than focusing solely on merging banks. Kshetry is of the view that strengthening banks in terms of capital only cannot ensure the stability of the country’s financial sector. “Basically, it depends upon steps taken by the regulatory authority to minimise the risks.
The depositors’ money in BFIs should be safe, those borrowing money from banks should be able to get loans without any hassle and the safety of payments needs to be assured. These factors have become necessary for financial sector stability in Nepal at the moment,” he said.
M&A Drive 2019: Which BFIs are going into M&As?
- Merger between Global IME Bank and Janata Bank
- Acquisition of Om Development Bank by NMB Bank
- Acquisition of Hathway Finance by Global IME
- Acquisition of Jebils Finance by Nepal Investment Bank
- Acquisition of Shahayogi Bikash Bank Ltd by Citizens International Bank
- Acquisition of Kailash Bikas Bank, Kankai Bikas Bank and Lalitpur Finance by Prime Commercial Bank
- Acquisition of Bhargav Bikash Bank and Purnima Bikas Bank by Shine Resunga Development Bank
- Acquisition of Nepal Community Development Bank by Tinau Mission Development Bank
- Merger between Suryadaya Laghubitta and Trilok Laghubitta
- Acquisition of Sweda Laghubitta Bittiya Sanstha by Vijaya Laghubitta Bittiya Sanstha
- Merger between NRN Laghubitta Bittiya Sanstha, Ramoshan Laghubitta Bittiya Sanstha, and Creative Laghubitta Bittiya Sanstha
- Merger between Arambha Laghubitta Bittiya Sanstha and Chautari Laghubitta Bittiya Sanstha
- Merger between Sarathi Laghubitta Bittiya Sanstha Ltd and Shatyawoti Laghubitta Bittiya Sanstha
- Merger between Kalika Laghubitta Sanstha Ltd and Janasewi Laghubitta Bittiya Sanstha
- Merger between Mirmire Laghubitta Bittiya Sanstha Ltd and Nagbeli Laghubitta Bikas Bank
- Merger between Womi Laghubitta Bittiya Sanstha Ltd and Nagarik Laghubitta Bittiya Sanstha
- Merger between Unnati Microfinance Bittiya Sanstha and Sahakarya Laghubitta Bittiya Sanstha Ltd
Banks submitting commitment letters to NRB
- Century Commercial Bank
- Citizens International Bank
- Civil Bank
- Global IME Bank
- Himalayan Bank
- Janata Bank
- Kumari Bank
- Laxmi Bank
- Machhapuchchhre Bank
- Mega Bank
- NB Bank
- NCC Bank
- NIC Asia
- Nepal Investment Bank
- Nepal SBI Bank
- NMB Bank
- Sanima Bank
- Siddhartha Bank
- Sunrise Bank
Fallout of liberal licensing policy?
The open licensing system for operating BFIs adopted by the central banking authority in the early 1990s led to the establishment of new BFIs in large numbers across the country. By 2010, there were around 200 financial institutions of class ‘A’, ‘B’ and ‘C’. Meanwhile, the class ‘D’ institutions or microfinance companies, whose total number stands at 63 at present, added to the ever-increasing number of financial institutions in the country. In the late 2000s, government and central bank officials began to see the Nepali financial system as fragmented and the high number of BFIs a threat to the country’s financial stability. NRB stopped issuing licenses to open new class ‘A’, ‘B’ and ‘C’ financial institutions from April 2010 and started discussing about promoting mergers and acquisitions (M&As) in the banking sector. The budget for FY 2010/11 provisioned a waiver of M&A fees for BFIs. Similarly, the central bank introduced Merger Bylaws and Acquisition Bylaws in 2011 and 2013, respectively.
Like in many other countries, M&As in Nepal have mostly remained as private affairs of banks where the regulator’s intervention is seen largely as unwarranted. During his tenure as the NRB Governor from 2010 to 2015, the current finance minister Dr Yuba Raj Khatiwada attempted to bring down the number of BFIs by announcing some fiscal incentives to BFIs opting for M&As in the monetary policy for FY2012/13 in a bid to accelerate the process of consolidation in the financial sector.
Similarly, his successor Dr Nepal also sought to indirectly push BFIs to M&As by increasing their minimum paid-up capital by four fold. This strategy did not work as expected because the financial institutions resorted to capital raising tools like issuance of rights shares, bonus shares and further public offerings (FPOs).
In January 2019, NRB issued a circular to BFIs that they would have to undergo mergers if they continued to ignore the central bank’s instructions to maintain good financial health. The circular said that BFIs that failed to meet the required minimum paid-up capital levels, facing losses for five consecutive years, flouting the central bank’s actions and directives and failing to maintain contingency reserve can be directed to merge with other institutions.