Upcoming Challenges for Financial Institutions in Nepal

-Amit Chalise 
Political instability, poor economic market, lack of infrastructures, poor work environment, unequally distributed development across the country all have contributed to a reduced performance of financial establishments in Nepal. All these deficiencies have created a very unhealthy financial market competition with mushrooming Bank and Financial Institutions (BFIS). With these existing nightmares, Nepal Rastriya Bank (NRB) added another trouble by implementing a new concept of raising a paid up capital of Class ‘A’ financial institutions to at least NRS 2 billion by fiscal year 2071. Most of the banks have already fulfilled this regulation. Among 31 ‘A’ Class banks, 8 banks remain to reach this new target. At first, it was just to be a stress for Commercial Banks but it seems to produce a hassle for every financial institution no matter of its size.

There are two possible means to achieve the new regulation of NRB for Commercial Banks. First probable way is to issue right share to the public. The main challenge that remains here is that to raise a capital by issuing right share, the bank must have shown a proper performance beforehand. Then only would it gain a trust from public that would invest on the issued right shares. Moreover, there are banks which require such amount that would still not be raised by just right shares. In this case, the second possible way is encouraged. These banks’ existence would only be promised if they shake their hands together for merger. In today’s economy and global market of Nepal, value of merger has reached to the peak which has provided stability to hundreds of small surviving businesses that were struggling to cope up with the demand of time. Merging of two or more financial institutions not only brings more potentiality in financial efficiency but also solves the mystery of raising the paid up capital as allocated by NRB. In fact, the whole point of NRB to introduce this regulation was to encourage banks to go for merging and acquisition. As IMF has strongly suggested NRB to bring down BFIs of Nepal less than 100 by upcoming years, there is no other choice for BFIs to go shake hands with other financial intuitions. Its intentions became clear when it publicised its plan to raise NRS 2 billion paid up capital to NRS 5 billion in coming future. This shook the ‘B’ and ‘C’ ­e banks. There are many micro level financial institutions in Nepal in the stage of closing down because of unhealthy competition. Merging is the greatest remedy to protect these smaller level institutions and to fulfil the requirement of NRB as well. Merging would protect the rise in unemployment rate in the economy because of these would- to- be closures. Recent example  of a successful merger is Global IME Bank which is performing very decent business  of 200 million in first quarter of 2070/71 after merge and have extend their branches and ATMs which has help customers to get banking facilities easily and quickly. It has also brought lots of skims and offers for the customer with revised on interest rate.

Hence, challenge of existence for financial institutions in Nepal is possible through merger. A merger is only successful with a proper due diligence, a strong management and a right combination of organizational culture of two or more than two merging establishments.

The writer is a researcher on ‘Merger and Acquisition (M&A) – Nepal BFIs’ and holds MBA on Financial Management from Birmingham City University, United Kingdom. 


Posted on: 2013-Nov-15