NRB dangles carrots for banks to pursue merger

KATHMANDU, July 25: Nepal Rastra Bank (NRB) has announced a number of incentives and facilities for bank and financial institutions (BFIs) pursuing merger in a bid to promote consolidation in banking sector.

Releasing 'Monetary Policy for Fiscal Year 2019/20' in Kathmandu on Wednesday, the central bank said that it will offer various benefits for BFIs going for amalgamation in line with the government's policy of encouraging 'big' merger in banking sector.

Against speculations and recent indication from the NRB Governor Chiranjibi Nepal that the NRB could pursue a 'carrot and stick' approach on merger and acquisition (M&A), the monetary policy for the current fiscal year has taken a line of encouraging BFIs rather than forcing them to go for the marriage.

Among others, the central bank has announced that commercial banks that complete their M&A and start joint operation by mid-July 2020 will get a relaxation in the deadline for maintaining priority sector lending requirement and interest rate spread. This means the merged entity will have to maintain directed sector lending requirement and interest rate spread by mid-July 2021.

According to the NRB rule, a commercial bank must float 25 percent of its total loans on agriculture, energy and tourism sector, while the interest rate spread (difference between interest rates on deposit and loans) should be at or below 4.4 percent by mid-July 2020.

Another incentive for the commercial banks going for the merger is waiver on cooling period for board directors, CEOs and deputy CEOs. Following the merger, board directors, CEO or Deputy CEO will not be barred from joining another bank before six months as is the case for other BFIs. Similarly, the central bank has said that it will not require merged entity to get its approval for expansion of branches. Another benefit for banking institution is the extension of the deadline on the new requirement to float debentures worth 25 percent of their paid-up capital until mid-July 2021.

“The consolidation of BFIs will be accorded priority to enhance the capacity of banking sector in mobilizing resources and increase people's access to finance,” NRB Governor Nepal said, unveiling the monetary policy.

Similarly, the monetary policy has announced that it will make an arrangement to send BFIs with crossholding of shareholders in more than one institution into M&A.

Gyanendra Dhungana, the president of Nepal Bankers Association (NBA), told Republica that the incentives and facilities offered by the central bank could encourage banking institutions to go for amalgamation. “The incentives and facilities announced in the monetary policy will entice BFIs, where there is crossholding of shareholders, to go for merger and acquisition,” added Dhungana.

Experts say that the central bank, through the monetary policy, has taken a 'wise approach' for consolidation in banking sector. “The incentives and facilities, particularly on interest spread, are important for tempting banks to go for merger if they have to maintain profitability in the merged institution,” Anal Raj Bhattarai, a banking expert, said.

Highlights:

Cash reserve ratio, statutory liquidity ratio (SLR) left unchanged

Private sector credit target up to 21 percent from 20 percent in last FY

Average annual inflation to be contained at 6 percent

Banks required to issue debentures equivalent to 25% of paid-up capital

Policy to be made for BFIs to open branches abroad

Maximum limit for debt service to gross income ratio to be fixed for home loans, hire purchase

Policy to be made for foreign currency payments for social media ads

Gold can be parked in banks as deposits