NRB lays out scenario for sending BFIs into forceful merger

Published On: January 5, 2019 09:43 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Jan 5: Nepal Rastra Bank (NRB) has announced that it may send bank and financial institutions (BFIs) to forceful merger in certain conditions. Issuing a circular to BFIs on Thursday, the NRB said that it may instruct BFIs with poor financial health to go for merger and acquisition. 

According to the circular, the central bank can tell any BFI to go for either merger or acquisition with a peer if it fails to meet its minimum capital requirement as set by the NRB within the deadline. 

Similarly, any banking institution that goes into losses for five consecutive years is another condition when the central bank can force it to go for merger or acquisition. 

If any banking institution faces actions of the NRB for flouting directives time and again, the NRB can instruct such bank to go for merger or acquisition with another bank or financial institution. 
Those licensed institutions who do not maintain contingency reserve may also be asked to go for merger by the NRB.

“The NRB can ask those institutions, who fail to meet either any or all of these requirements, to go for merger and acquisition,” read the circular of the NRB. 

The central bank’s directive laying out provisions on forceful merger and acquisition comes amid calls for reducing the number of BFIs. 

Though the central bank’s decision to raise the minimum paid-up capital by multiple times including four-fold for commercial banks in the monetary policy for the Fiscal Year 2015/16 prompted many BFIs to go for amalgamation process, NRB officials in private say that their implicit objective to significantly reduce the number of BFIs has not been met.

According to the NRB data as of mid-November last year, 164 BFIs (including ‘D’ class) went for merger and acquisition. Out of which, the license of 122 BFIs was revoked, thereby forming 42 BFIs in the review period.

As part of encouraging merger and acquisition, the central bank also said that it would give a priority for the application of the BFIs for class upgradation license after taking the amalgamation process into conclusion. 
Meanwhile, the NRB has introduced a new directive on the conversion of promoter shares into public that will tighten the supply flow of shares in the stock market. BFIs are allowed to convert their promoter shares into public shares in a way that does not go below 51 percent. 

The central bank has brought the circular restricting BFIs to convert huge promoter shares at once. With the new rule in place, a bank or financial institution will not be allowed to convert such promoter shares more than 10 percentage point at once. Promoter share conversion will not be allowed more than two times, according to the circular. 

The rule is aimed at tightening the flow of shares in the stock market which is in the bearish trend partly due to the oversupply of stocks following the issuance of rights and bonus shares of BFIs after the central bank raised the minimum paid-up capital by at least four times.

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