Thu, June 13, 2024

Transformational shift mergers and acquisitions in Nepal’s banking industry

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The buzz surrounding mergers and acquisitions (M&A) has reached a crescendo in recent times. Embraced as a strategic business maneuver, M&A involves the consolidation of two or more organisations towards a shared objective or even the complete acquisition of one entity by another. This dynamic approach is predominantly aimed at achieving heightened competitiveness, bolstering efficiency, slashing costs, and maximising profits. With its profound impact on the global financial landscape, M&A has been a pivotal force reshaping the very essence of the banking industry.

Originating in the United States during the early 1980s, the momentum of M&A was further propelled by the Asian Financial Crisis of 1997-98 and the seismic Global Financial Crisis (GFC) of 2007-08. These pivotal events catapulted M&A into the limelight, propelling its significance in the financial realm to unprecedented heights.

In 2011, Nepal Rastra Bank (NRB) introduced the Merger Bylaws Policy with the aim of strengthening the capacity of banks and fostering healthy competition, especially in anticipation of foreign counterparts entering the market. However, by 2012, the number of Banking and Financial Institutions (BFIs) had surged to 220, comprising 32 commercial banks, 88 development banks, 77 finance companies, and 23 Micro Finance Institutions (MFIs). This high number of BFIs, relative to the size of Nepal’s economy, resulted in detrimental consequences. Unhealthy competition ensued among BFIs as they vied for deposit collection, loan disbursement, and an increasing share of bad loans, ultimately leading to underperformance issues.

To address these challenges, NRB introduced various regulatory measures, including the acquisition bylaw in 2013, which was later integrated into the merger and acquisition bylaw of 2016. These regulatory provisions aimed to facilitate consolidation within the banking sector and promote stability, efficiency, and sustainability in the financial industry. By encouraging mergers and acquisitions, NRB sought to streamline the number of BFIs, promoting a more robust and competitive banking landscape that could better serve Nepal’s economic needs.

In the aftermath of these visionary moves, Nepal’s banking landscape witnessed a surge of transformative mergers. The NRB’s strategic initiatives coupled with Article 177 of the Banks and Financial Institutions Act 2063 (BS) and Articles 68 and 69, have collectively encouraged BFIs to embark on the journey of consolidation. Further, the 2015 monetary policy proved to be a game-changer as NRB unveiled a remarkable four-fold hike in the minimum paid-up capital for commercial banks and an astounding 24-fold increment for development banks. This bold mandate necessitated commercial banks to elevate their paid-up capital to Rs. 8 billion, while nationwide-level development banks required a substantial increase to Rs. 2.5 billion. The resolute stance taken by the banking regulator fortified the conditions necessary to foster a seamless merger and acquisition process.

Astutely seizing the opportunity, numerous BFIs embraced mergers as a strategic pathway to outmaneuver their competitors, attaining a coveted competitive edge. These amalgamations proved instrumental in achieving a harmonious confluence, ushering in enhanced financial indicators and expanding market shares. Emanating from NRB’s visionary endeavor to streamline the number of BFIs to an optimal level, bolster competitiveness, and institute fair banking practices, Nepal’s financial sector bore witness to a wave of transformative mergers over the past decade. One of the earliest milestones in this transformative journey was the 2004 merger between Laxmi Bank and HISEF Finance Company, setting the precedent for future M&A activities in the financial sector.

Beyond the realm of financial institutions, BFIs play a crucial role in supporting Nepal’s overall growth financing program. Operating as representatives, investment and working capital financing companies, and vital channels for funding underfunded individuals, they contribute significantly to the economic fabric. As institutions of public trust and indispensable components of the financial system, BFIs boast a strategic position, becoming formidable allies in propelling economic development to greater heights. Remarkably, the M&A surge has led to 20 Commercial Banks in Nepal undertaking mergers or acquisitions with other BFIs, creating a dynamic transformation in the banking landscape.

The journey towards M&A, however, is not without its share of challenges. Securing the perfect merger partner proves to be a delicate dance, requiring a meticulous alignment of long-term goals and vision. Deciding on a swap ratio during the merger process can be a tightrope walk, demanding keen negotiation skills. Additionally, the impact on employees, customers, and stakeholders cannot be underestimated. Post-merger, meticulous employee management becomes paramount as organisational dynamics and policies undergo fundamental changes, necessitating a delicate balance between expectations and reality.

The path to merging two banks necessitates considerable upfront costs, integrating systems, processes, and operations with utmost precision. Cultural disparities between merging entities can create internal rifts, hindering effective collaboration and productivity. Customer anxiety, resulting from uncertainty, may drive some clients towards alternative banking options, potentially leading to lost revenues and diminished market share. Regaining customer confidence becomes an ardent task post-merger.

Navigating regulatory approvals is a labyrinthine process, demanding patience and due diligence. Integrating technology systems can cause operational disruptions and downtime, impacting customer service and financial performance. Moreover, an increased exposure to credit risks for the merged entity, especially if one of the banks holds a higher proportion of risky assets, requires vigilant risk management strategies. Yet, despite these multifaceted challenges, the potency of mergers and acquisitions remains undeniable.

Many banks embark on this journey to capitalise on long-term benefits. Recognising these challenges proactively becomes a vital ingredient in successfully navigating the M&A process, ensuring enduring financial prosperity and strength for the merged entity.

In the throes of an extraordinary transformation, Nepal’s banking industry finds itself on the precipice of a new era. The powerful impact of mergers and acquisitions has steered the course of this journey, marking a definitive shift towards progress and prosperity. As Nepal’s financial landscape continues to evolve, embracing the transformative potential of M&A will undoubtedly lead to a brighter, more robust future for its banking sector and the nation at large.

Ashoke SJB Rana, Chief Executive Officer of Himalayan Bank, says, “In the context of M&A in Nepal, I would like to refer to only the merger and acquisition policy initiated by Nepal Rastra Bank for the consolidation of financial institutions in Nepal. NRB came out with a policy guideline and a specific directive in this regard. It contained incentives and some regulatory forbearance for a certain time period to comply with NRB rules.” He adds that Himalayan Bank’s experience with the acquisition of Civil Bank has had some major surprises. “While the overall acquisition has propelled the bank into a larger capitalised institution with a bigger network of branches and human resources, the financial integration has been challenging,” he shares.

Rana states that one of the other major financial issues has been tax uncertainty. “As you may be aware that all banks have been presented with an unforeseen tax on the swap ratio as a bargain/purchase tax. Assessing the financials of the target institution has been challenging. Also aligning staffing issues and operational practices are key to a successful merger. Overall, we support and agree with the rational for NRB to introduce the merger and acquisition policy.”

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MAY 2024

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