Respond to merger bids

The seriousness shown by a dozen development banks and finance companies in mergers and the initiative taken by them through applications for the purpose at the central bank are encouraging signs. They indicate that players in the financial system have finally realized the need to fortify their institutions, strengthen their client base, capital and capabilities, expand business and ultimately bring about their own institutional wellbeing. Hence, this is the right time for Nepal Rastra Bank (NRB) to reciprocate such initiative, speed up the processes from its side to free them from unnecessary bureaucratic maze and live up to its promises to deliver.



Undoubtedly, the Nepali financial sector has undergone an unnatural expansion over the past seven years and now has over 200 financial institutions actively engaged as financial intermediaries. Despite such growth, however, Nepal continues to fare poorly in terms of enhancing people’s access to formal financial services. Only 35 percent of Nepalis actually enjoy formal banking services. What this meant is that the mushrooming financial institutions confined their operations largely to the cities and fought over the same business pie.



This undesirable city-centered financial bubble eventually brought a number of evils in train: unhealthy competition, imprudent lending, asset bubble, irresponsible liquidity management, poor governance and banking fraud. At the same time, NRB, which is supposed to monitor and regulate the sector, failed to bolster its supervisory capacity. Consequently, in some cases NRB took over two years to conduct onsite inspection of an errant financial institution. No wonder promoters and top managers felt emboldened to engage in banking fraud. These evils coupled together invited the present turmoil in the system. Managing this turmoil and the looming crisis call for numerous corrective steps. And mergers constitute one crucial step.



Hence, we urge the central bank to respond to the merger applications with promptness. After all, mergers will not only help the weaker institutions but also ease NRB’s supervisory functions. Currently, the central bank is forced to focus on too many issues with too little supervisory manpower. Some of the banks are overflowing with liquidity while others are still suffering a crunch. Some financial institutions have maintained their capital requirements and observed other prudential norms, but many others are failing to do so. The nitty-gritty of the scenario has, in the process, caused a dilution in NRB’s focus on graver issues like governance problems and banking crime. By encouraging mergers, the central bank can relieve itself and the system as a whole of a big burden. For this, there is an urgent need to establish successful cases of mergers.

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