Immediate necessity of merger of financial giants

Central Bank of Nepal (Nepal Rastra Bank) has adopted a policy of merger of mushrooming Business Financial Institutions (BFI) around 7 years ago by law. Within the time frame, we have witnessed many significant positive changes in Merger & Acquisition (M&A) in Nepal. Few of them are capital and temporary profitability increment, staff management, business expansion and quality banking. However, this is the first phase of entire merger and acquisition process. The result of entire M&A can be drawn only after a decade, so we can project a looming picture of it at the moment.
The current financial situation of most of the commercial banks in Nepal indicates that they are struggling to fulfil the policy of Nepal Rastra Bank (NRB) to decrease the numbers of financial institutions and create a healthy market competition. Merger is indeed an opportunity to invite new financial market environment in Nepal and seems promising approach as of yet. In the first wave of merger, significant yield in the business profit was not possible immediately after raising the paid up capital to a minimum of 8 Billion rupees. This paid up capital did not necessarily increase the profit for investors. In fact, the investors have to wait for a minimum of 5 to 7 years for their return or may be more in some cases.However the operational perspective is concerned, it was not very promising. The most common challenge in the first wave is the human resource management that could have been eliminated increasing the business size by 25-30 % as per the international practice of M&A. However, the Nepali BFIs struggledhard to manage this challenge alone at the beginning.
Lack of due diligence in the management has been noticed as another important challenge that BFI’s faced in the recent years in the first wave. The varied organisational culture and structure, managerial traits, board committee composition, are few essential aspects that are seen to be ignored during due diligence period. Mostly due diligence will only be successful if it is conducted by an external ad-hoc committee. The current practice to carry out such due diligence is generally by a committee that is itself involved in the process of M&A. So there is the possibility of failure resulting in demerges or unsuccessful M&A due to conflict of interest. In fact, the regulatory body also needs to increase its commitment to guide BFIs effectively.
In fact, the market has suffered many demergers or unsuccessful mergers during the first wave of M&A. Consequently, such failures tarnish institutional goodwill and public image, its stake value and stakeholders confidence. It would be wrong only to hint at the unsuccessful stories of the merger, there are successful mergers also that pushed market stability as a strong pillar for hundreds of small businesses that were struggling to cope up with the demand of time and law. Basically in Nepal,thesmall businesses are the backbone that needs petty investments as vital to lead the country towards economic growth. Merging of two or more financial institutions into one is definitely potential to enhance financial capacity.
The Central Bank of Nepal has recently indicated that it will introduce the second wave of M&A soon. The BFIs structure indicates that now therewill be the merger of big ones compared to first wave. Mostly the big mergers are only successful with proper due diligence, effective management and right amalgamation of organisational culture of two or more merging establishments. So, it is vital to follow international practices if we want to meet international standards. To be more effective BFI, 5-6 strong financial entities with at least NRS 50 Billion paid up capital would meet the commitment of the Government of Nepal to construct railways, mega hydro-power projects, roads and so on. Stronger entities would also increase Nepal’s credibility in global financial market. This willalso enable Nepal to improve international financial trade relationship. By this way, Nepal can enter to globalised financial market at one side; the growth of Nepali BFIs will also take place at the other. In fact, the Nepali financial market currently is not satisfactory in world ranking by international associations such as Financial Action Task Force (FATF), Transparency International and so on. Merger of big BFIs could be a solution to improving our international image for economical growth as a whole.

(The author is currently working as Senior Business Development Managerand Sole Representative for Global IME Bank at UK. He specialises in Merger and Acquisition in financial management from Birmingham City University, UK).