Mergers and Acquisitions Of Development Banks In Nepal

June 18, 2019 | Investopaper

Introduction

Nepal Rastra Bank (NRB) introduced the Merger Bylaw 2068 (2011) to encourage all Banks and Financial Institutions (BFIs) for the merger. The motive of the central bank was to decrease the number of BFIs and strengthen their financial condition. But, only a few financial institutions merged. Hence, in order to force the BFIs into the merger, NRB  raised the minimum paid-up capital requirement.

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NRB enforced BFIs to increase the capital by 4 times through the monetary policy of 2015. “A-class” commercial banks needed to meet the capital of Rs. 8 Arba. Likewise, “B-class” development banks were directed to increase the capital to Rs. 2.50 Arba. And the “C-class” national level finance companies had to meet the capital requirement of Rs. 80 crores. Previously, A, B & C class BFIs had paid up capital requirement of Rs. 2 Arba, Rs. 64 crores and Rs. 20 crores respectively.

Due to the effect of the Merger Bylaw 2011 and the monetary policy of 2015, the number of financial institutions has reduced drastically. However, this is due to the decline in the number of development banks and finance companies in Nepal. The merger between the commercial banks failed. The impact of merger and acquisition was most seen in the B and C class financial institutions.

Related: Merger/Acquisition Of Microfinance Companies In Nepal

We will look into the mergers and acquisitions of development banks of Nepal.

Development Banks of Nepal based on their area of operation

Currently, there are 32 development banks operating in Nepal after the recent acquisition of Hamro Bikas Bank by Jyoti Bikas Bank Limited. Out of the 32, there are 11 national level development banks. Shine Resunga Development Bank is the only development bank operating in 10-districts. The number of development banks operating in 3 districts is 17. Likewise, 3 development banks are operating in a single district.

Related: List of ‘B’ Class Development Banks In Nepal [Updated]

Number of Development Banks in different time periods

The number of development banks grew from 2005 to 2012. In 2005, only 26 development banks were in operation. Then, the development banks gradually increased in the next 7 years. In 2012, there were 88 development banks in existence. Due to the merger bylaws 2011, the number declined to 83 in 2014. After the capital increment directive in monetary policy 2015, the number of development banks has massively reduced to 33 in 2018. Several development banks have recently signed a merger or acquisition agreement in 2019.

The growth and decline in the number of  development banks can be seen in the chart below:

Mergers and Acquisitions of development banks of Nepal

The development banks which have already merged or acquired by other financial institutions are shown in the table below:

Development Banks who are in the process of merger/acquisition

12 development banks are currently in the merger/acquisition agreement. This is likely to further reduce the Development banks. OM development bank has signed a merger agreement with NMB Bank Limited after failed acquisition by Prime Commercial Bank. Shine Resunga Development Bank is going to acquire Purnima Bikas Bank and Bhargav Bikas Bank.

Likewise, Kankai Bikas Bank is to be acquired by Prime Commercial Bank limited. Tinau and Mission Development Bank will enter into merger forming Tinau Mission Development bank and it will acquire Nepal Community Development Bank.

Similarly, Deva Bikas Bank will acquire Western Development Bank. Also, Saptakoshi Development Bank and Kabeli Bikas Bank have entered into a merger agreement.

Conclusion:

Due to the intention of Nepal Rastra Bank to reduce the number of financial institutions of Nepal, several development banks have already undergone a merger or acquisition. This has resulted in a huge reduction in their number. This number is likely to decrease further as 12 more development banks have already signed the merger or acquisition agreement. Looking at this trend, the existence of the development bank sector is in question. Is this a good strategy of NRB? What is the purpose of dividing the financial institutions into A, B, and C class when there is a chance of extinction of B and C class institutions? Bigger size may not be always better. Several development banks are in good financial health than some of the commercial banks. It is better to rethink the policies before it is too late.

Read Related Contents:

National Level Development Banks Of Nepal: Comparative Analysis

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