An economy of Rs 3 trillion with 157 banks and financial institutions; What is hindering the consolidation goal of Nepal Rastra Bank

On Shrawan, 2072 Nepal Rastra Bank (NRB) issued a directive mandating a rise in the minimum paid-up capital of all the banks and financial institutions. The primary goal – Consolidation. Despite the fact that NRB hadn’t mentioned any overt goals behind it, it seemed pretty clear that NRB wanted BFIs to go for merger and acquisition. The one reason behind is the very short deadline. The banks had the choice to meet the minimum paid-up capital requirement via bonus and right shares but the 2 years’ deadline made it a considerable feat.

The minimum capital requirements for each class of BFIs were increased in the following manner:

Once the minimum paid-up capital was raised a lot of companies distributed bonus shares, issued right shares and went for Further Public Offering (FPO). Similarly, some of the companies went for Merger and Acquisition which again is below what was expected. The total number of BFIs licensed by NRB in this period are given below:

As we can see from the table above, the number of developments banks and finance companies has decreased substantially but the number of commercial banks hasn’t. In case of microfinance companies, we can see a reverse direction where the number has increased almost twice the initial size.

The tremendous fall in the number of development banks surely points to extensive merger and acquisitions that took place and this in turn also shows in their financial indicators. Today, if we compare the financials of top development banks with that of average commercial banks, we won’t find much difference. One such bank in Muktinath Bikas Bank. MNBBL has been consistently reporting fantastic results and is top of the class. You can see their performance in this quarter here.

Our position

Our economy is of a relatively small size and that is a fact. The number of BFIs mentioned above is a fact. The dilemma here is, whether this number of BFIs for an economy with a GDP of Rs 3 trillion is good or bad. We have examples of economies that have done exceptionally well with a few banks with huge capital and we also have examples of economies that have done equally well with large number of banks by creating healthy competition driving the economy upwards.

The basic logic is initially when the industry is growing larger number of banks creates competition and with competition comes efficiency and growth. Once the industry becomes matured and the market gets saturated then the companies will automatically go for consolidation as there is no more new market to compete for.

However, this logic hasn’t fully worked for the banking industry of Nepal. Despite the efforts of NRB, the number of commercial banks just went down by 2, while the number of development banks and finance companies went down by 43 and 23 respectively.

This discrepancy makes us question, is it the size that makes it difficult? Or is it the Human Resource?

Well, for any argument to be strong we need logical inference and for that lets consider some of the M & A issue that took place or came to taking place.

Mega bank (MEGA) and Tourism Development Bank (TDBL)

The M & A between MEGA and TDBL took more than 2 years and the shares of TDBL were frozen for 2 years 4 months due to the ongoing merger process. Anupama Khunjeli, in an interview with Sharesansar, shared that Merger is quite like a Marriage thereby emphasizing that it’s not just the names and balance sheet being merged but the entire organizations which includes its people.

She said, “The concentration was not on how long it has taken rather on how strong the foundation has been made.” Being 2 large organizations, there were set on their ways of doing things and their own organizational culture. In case, one’s culture doesn’t match with the other, the latter may feel threatened.

MEGA is commercial bank, TDBL was a development bank and the swap ratio was set at 100:95, which meant MEGA had an upper hand. So, it is only obvious that managers and employees of TDBL may feel insecure about their position at the new bank. Therefore, as Ms. Khunjeli expressed, it was necessary to ensure that everyone was on the same page. It wasn’t just about the management team but the managers and officers too.

So, given such hassles in mixing and managing HR (Human Resource), M & A might not have been the first choice for most commercial banks.

Everest Bank and Laxmi Bank (EBL and LBL)

The merger between EBL and LBL had swept the market off its feet when the talk first started. Sharesansar had also done a comparative study to see the pros and cons of such huge merger.

If they had gone through with it, then the merged entity would be the largest in industry and that too be enormous lead. However, the talks just dialed down and stopped, until a few days ago.

In an event organized by EBL, Mr. B.K. Shrestha (Chairman of EBL), shed light into what happened. He admitted the talks did happen for merger. Since both the banks are large and strong, they agreed on hiring an international agency for Due Diligence Audit (DDA). Therefore, Mr. Shrestha said, they hired Ernst & Young for the job and the swap ratio came out at 2.75:1 i.e. 2.75 shares of LBL for 1 share of EBL.

Then, they had a meeting where LBL wanted to negotiate the swap ratio, but EBL was set on the Ernst & Young’s prescription. This disagreement killed the progress of merger between them. So, turns out, Size and the adamance that comes with it, can be an issue.

While on the flow, Mr. Shrestha also talked about their merger talk with Nepal Investment Bank (NIB). They had signed a preliminary Memorandum of Understanding (MoU) in September 2010, subject to approval from the Board of both banks. However, as soon as the talks hit the market the employees and some of the management level staffs of NIB protested opposing the merger.

In this case both size and people were the issue. According to the media reports back then, the disagreement was on who will have the bigger stake. And according to Mr. Shrestha’s remarks it was the people. He said at the program, “EBL has a very strict professional recruitment procedure so even if you try to find you won’t find any of our relatives employed in EBL. However, same can’t be said for NIB and due to that there was opposition.”

Bottom line

The bottom line of this article is, consolidation of financial market is easier said then done. It is a service-based industry and has human involvement at every touch point. So, any M & A can’t be just about the size of balance sheet and the number of branches. The people of organizations and the way they operate should also be taken into consideration.