The new regulations also incorporate a provision of forceful merger, going by which the central bank can instruct two or more banks and financial institutions (BFIs) to undergo merger if it deems appropriate.[break]
“The central bank can instruct or suggest to BFIs to merge in case representatives of the same group, firm or company are found assuming posts in the board of directors of both BFIs and their financial conditions remain unhealthy,” reads the rule.
That is not all. BFIs could get notice from NRB to merge if their non-performing loans (NPL) exceeded 5 percent of the total loan portfolio for 3 straight years or they faced prompt corrective action (PCA) in three or more instances.
Likewise, NRB can also instruct the BFIs to merge if it finds their independent operations are causing negative impact on the banking system and even in case the NRB thinks merger of systemically important BFIs will strengthen the banking system.
“Basically, the regulations allow NRB to force BFIs to merge in any situation. This is foul play,” said a banker, preferring anonymity. He even charged the central bank of deceiving bankers, as senior NRB officials had announced withdrawal of the provision of such forceful merger from the draft regulations they had discussed.
However, the central bank officials said the provision was retained mainly to open an option whereby central bank could take forceful steps to revive sick BFIs, instead of liquidating them.
As for the incentives, the new regulations has pledged relaxation on provisions on capital structure, shareholding limit for promoters, credit-deposit ratio, borrowings limit for promoters and deprived sector lending, among others.
If the merger appeared to raise volume of shares held by promoters to exceed the stipulated limit, the central bank has granted five years to the promoters to bring down the volume of shareholding within the limit.
Likewise, merged institutions have been pledged additional three years to bring CD ratio at 80 percent. Promoters have been granted additional 3 years to bring down their loans to below 50 percent of the total shares they hold in the merged BFI.
In a bid to lure BFIs to merger, the central bank has even promised a discount in refinance rate by one percentage point to the merged institution. It has also offered to lower penal rate on standing liquidity facility by half for three years in case two or more BFIs merged into one.
The central bank has also opened upgrading of institutions to BFI of higher category if two or more BFIs decided to undergo merger, raised the paid up capital and put in place necessary infrastructure.
The rules also promise to recommend to the government deduction and exemption of taxes in case BFIs faced losses during the course of merger.
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