After the issuance of merger bylaws by the central bank of Nepal in 2011 and capital enhancement policy in 2015, merger and acquisition activities among BFIs took a rate of knots. Their mergers have had a positive impact on financial indices although there is some turmoil in human resource integration
" Americans make money by playing 'money games', namely mergers, acquisitions, by simply moving money back and forth ... instead of creating and producing goods with some actual value." - Akio Morita, Japanese businessman and co-founder of Sony Merger and acquisition is the fusion of two or more companies to attain a certain goal. Mergers and acquisitions are one of the most desirable options to toughen the economy that is just at the upper turning point. It can strengthen a company's capital base, and in the case of banks and financial institutions (BFIs), the risk bearing capacity is enhanced.
On August 4, 2021, Harvard Business Publishing Education published a case study on the amalgamation of two equal-sized Indian banks for the first time –Allahabad Bank with Indian Bank. The outcome of the study 'Merger of Equals' has concluded that Indian Bank not only emerged in a better financial state than before but also laid down its vision as a future-ready bank. Globally, there are two growth options, internal expansion or organic growth and external expansion or inorganic growth.
Mergers and acquisitions are a part of inorganic growth whereas franchising, licensing, joint ventures, strategic alliances and the appointment of overseas distributors are alternatives to mergers and acquisitions. So, merger and acquisition can be a tremendous economic tool for expansion within national boundaries.
After the issuance of merger bylaws by the central bank of Nepal in 2011 and capital enhancement policy in 2015, merger and acquisition activities among banks and financial institutions took a rate of knots. As a result, 185 A, B and C class BFIs as of mid-July 2010 have been reduced to 62 by mid-July 2021. Their mergers have had a positive impact on financial indices although there is some turmoil in human resource integration.
In a bid to save financial institutions and perk up financial ratios, bank merger can be an alternative option, if BFIs are not enough to grow organically or internally.
Before going into acquisition in 2016, the capital adequacy ratio (CAR) of Grand Bank Nepal Limited (GBNL) was below 10 percent and had reported a net loss of Rs1.6 billion after it failed to recover some big loans. After its merger with Prabhu Bank, it not only recovered its financial position but also posted a remarkable profit in the succeeding years.
Similarly, Machhapuchhre Bank Limited (MBL) and Standard Finance Limited started joint operation on July 9, 2012. Before their merger, the CAR of MBL was below the regulatory requirement of 10 percent and was unable to do good business despite plenty of opportunities. However, Standard Finance's CAR was pretty high, putting its fund idle. So merger and acquisitions became a milestone for both the BFIs.
Researchers often refer to the Malaysian model of bank mergers. After the Asian Financial Crisis in 1997, Bank Negara Malaysia (BNM), the Malaysian central banking authority, introduced a forced merger policy, which reduced the number of banks from 71 to 24 from 1999 to 2000. At present, nine local and 20 foreign banks operate in Malaysia, which has become a Tiger Cub economy of Asia. Although the applicability of the Malaysian model in Nepal is not clear, Malaysia's economy was in recovery stage, or growing stage, in 1997 as Nepal is today. The GDP of Malaysia was less than US$ 100 billion in 1997 whereas the GDP of Nepal was$34.47 billion 2020. In 2020, the Malaysia's GDP was$338.28 billion and is expected to reach $359 billion by the end of 2021.
Hence, bank merger became one of the root causes of development when Malaysia's economy was growing.
So mergers and acquisitions can be one of the preferred alternatives for healthy and heavy capital investment in the country.
In another instance, the Government of India had adopted measures to reform itspublic sector banks (PSBs), and strengthen their competitiveness. It merged 10 PSBs into 4 and started joint operations from April 1, 2021. With this, the number of PSBs came down to 12 from 27 in 2017.After 10 months of mergers, the Reserve Bank of India, in a summary report, highlighted superior performance following the mergers.
Correspondingly, passing through the different waves of mergers to cope with the need of the economy for capital adjustment, today State Bank of India is one of the largest banks in the world with 245,652 employees with each employee contributing a net profit of Rs 828,350 during 2020- 21. However, mergers cannot be the magic trick in the corporate world for whatever the reason. In July 2006, facebook rejected the merger offer of google.
Rather than go for mere integration, a post-merger strategy along with a proper human resource assimilation and placement plan is essential. In 2016, Tesla rejected the acquisition offer of Apple.
Merger and acquisition is an ongoing process. The different five waves of mergers in the 20th century occurred during the periods of 1893-1904, 1919- 1929, 1955-1975, 1984-1989 and 1993-2000 mainly in the United States, UK and European countries. Merger waves have provoked major changes in the corporate structure with high economic growth, technological innovations, recovery from economic recession and to recovery stage.
According to Angela Braley, CEO of a US-based health insurance company, talent and scale are obtained from mergers.
Economic and financial volatility, ongoing trade deficit, limited investment opportunities, competition with foreign banks, dependency on external factors like tourism, remittance and government expenditure are some of the problems of Nepali banks.
On the other hand, the Nepali banking sector is experiencing excess and shortage of loanable funds in a very short span of time, which may even lead to bankruptcy if there is no flow of regular funds to ongoing projects. The problem can be suppressed by the formation of capable and large-scale financial institutions.
Sharma is a banker
A version of this article appears in the print on October 22, 2021, of The Himalayan Times.