Merger of the banks

DR. JIBA RAJ POKHAREL

Banking can be described as a recent phenomenon in Nepal when compared to its rather archaic beginning in the other countries. The first bank of Nepal, the Nepal Bank Limited was established in the year 1937 while it took two more decades for the second bank of Nepal, Nepal Rastra Bank to appear in the scene, in the year 1956. Nepali people had to wait impatiently for a decade to have a glimpse of the third bank of Nepal in Nepal Banijya Bank, in the year 1966. In contrast, Mesopotamia had banking underway right from the times of Hammurabi dating back to ca 1760 BC. In Greece, it emerged into the national scene from the fifth century BC with Pythius as a renowned merchant banker. More interesting is the case of Greek citizen Pasion who became the wealthiest banker, despite being a slave. In Britain, the first bank, the Bank of England, was established in the year 1694.

Whilst the emergence of the banks in the Nepali national scene was in mere trickles in the early days, it became torrent especially in the nineties, it being marked by the mushrooming of the financial institutions in Nepal with 279 banks and non- bank financial institutions licensed by NRB consisting of 30 “A” class commercial banks, 88 “B” class development banks, 79 “C” class finance companies, 21 “D” class micro-credit development banks, 16 saving and credit co-operatives and 45 NGOs. Banking forms the spine of the national economy around the globe and so in Nepal in view of the total deposit of 678 billion rupees.

Banks as intermediaries play a significant role in economic growth, provide funds for investment and keep the cost of capital low. In Nepal, banks have a significant role to play against the backdrop of 15.1 per cent of the people still relying on local money lenders at the present, even though it is certainly a great improvement in view of more than 39.7 per cent of the people practicing this traditional mode of borrowing 15 years back.

The proliferation of the financial institutions is a global phenomenon, and Nepal could not remain insulated from this universality. On one hand, it has incredibly increased the access of people, as can be seen from the result of Nepal Living Standard Survey 2011 with 53.9 per cent of the people enjoying the services of the cooperative, and 39.9 per cent that of a commercial bank at present versus only 25.9 per cent and 20.7 per cent in 1995/96 respectively, it has also presented some insurmountable problems on the other. The problems are manifest mainly in the form of a number of them falling victim to insolvency and financial distress, huge levels of non- performing loans, over-lending to the unproductive real estate sector and imprudent exposure to share-based lending particularly during the earlier boom period.

As a result, countries worldwide have embarked on a campaign of reducing the number of banks because their large number does not bode well for the banking administration. For instance, the United Kingdom and Australia each have four major banking groups and Singapore has five, with the latter intending to reduce their number to even two. The IMF too has forced countries under their programs in Indonesia, Thailand and South Korea to reduce the number of banking institutions by effectively closing them down.

Nepal has also initiated the merger of the banks virtually as a last straw in view of the collapse of several of them in the recent past. We have to wait to know whether this merger exercise will be a star performer or an utter disaster, as it is still in an embryonic state in Nepal.

A study recently made in India on the merger of banks, following the recommendations of Narishmam and Verma committees can, however, be an eye-opener in this regard. The overall results of the study indicate merger leading to higher level of cost efficiencies. Merger between distressed and strong banks did not yield any significant efficiency gains to the participating banks.

However, the forced merger among these banks succeeded in protecting the interest of the depositors of weak banks, but stakeholders of these banks have not exhibited any gains from the mergers.

Findings in India further indicate that Lilliputians should not be merged with Gulliver banks due to the likelihood of adverse effects on the asset quality of the latter. The merger of the strong banks with strong banks appears to be the need of the hour to compete with the foreign banks and to enter into the global financial market.

The requirement is for very large banks to absorb various risks that have been emanating from operating in the local and global market. The prime factors for future merger in Indian Banking industry included the Bassel II environment, challenges of free convertibility, and requirement of large investment banks.

The Indian case appears equally relevant for Nepal. Therefore, the government and policy makers in Nepal also should bear this fact in mind while promoting merger in order to ensure its success. A fiasco may deal a fatal blow to the banking sector in Nepal.

Dr. Pokharel is currently the Director, Infrastructure Development Bank