KATHMANDU, APRIL 25
A recent Nepal Rastra Bank (NRB) study titled 'Optimal Number of Banks and Financial Institutions in Nepal' has revealed the possibility of further consolidation in the banking industry, with the optimal number of commercial banks suggested at between 11 and 15.
Currently, there are 27 commercial banks in operation in the country.
According to the study, half of the respondents opined that the optimal number of commercial banks for Nepal is 11 to 15, another one-fifth preferred five to 10 commercial banks, 15 per cent preferred 16 to 20 banks and rest preferred 20 to 25 commercial banks.
Of the 230 respondents in the survey, 140 were bank officials whereas 90 were experts. The study had usedopinion survey to gather perceptions and opinions on the financial consolidation process in Nepal.
The merger and acquisition activities in Nepal gathered momentum after the introduction of merger bylaw in 2011.
With the implementation of the bylaw, there has been a significant progress in the merger/ acquisition of the BFIs. As of mid-March 2022, the number of institutions involved in merger process has reached 239, out of which the licence of 177 BFIs has been revoked, as per the NRB.
One important finding of the study was that Nepal's banking sector is less concentrated compared to other economies. The results imply that there is sufficient level of competition in the banking industry and the market power of the individual banks is comparatively low.
Another important result cited in the survey is that in many peer countries measured in terms of the size of the economy, per capita GDP and population size, the number of commercial banks is lower than Nepal.
If we consider the development banks as well as finance companies that carry out the similar roles of commercial banks, the number of banks in Nepal is larger than the peer economies. It has been also supported by the survey results.
About 84 per cent of the respondents from the BFIs and 78 per cent of the experts opined that the existing number of the BFIs in Nepal exceeds the optimum number.
As per the survey, majority of the respondents opined that the most appropriate modality for reducing the number of BFIs in Nepal could be some kind of incentive merger. About 57 per cent of the respondents stood in favour of incentive merger, 20 per cent in favour of forced big merger, 17 per cent in favour of voluntary merger and the remaining respondents were in favour of merger through capital increment Most of the survey respondents (61 per cent) opined that merger should be done between weak and strong institutions.
Another one-fifth of respondents were in favour of the merger between small and large institutions, nine per cent were in favour of small institutions only and the remaining respondents were in favour of the merger between weak institutions.
Even though statistical models cannot exactly tell the optimal number of banks in an economy, low level of concentration in the Nepali banking industry imply that further consolidation can be done without creating enough room for monopolistic power, the survey has noted in conclusion.
"If a proper balance between efficiency gains from merger and anti-competitive effects is maintained, healthy and resilient financial system can be built with the consolidation while ensuring increase in consumer welfare," as per the survey conducted by the Economic Research Department of the NRB.
A version of this article appears in the print on April 26, 2022, of The Himalayan Times.
