Merger incentives

Though late, the policy announcement made by Nepal Rastra Bank (NRB) that is unveiling additional incentives to the banks and financial institutions opting for a merger is a welcome move. In addition to the budgetary policy of pledging tax waiver on merger related transactions, NRB policy is a boost to the much-needed mergers among financial institutions that has added a fresh momentum to the flagging financial sector. No further debate is needed to justify an urgent need for such a policy. With the sharp rise in the number of players engaged in stiff and sometimes unhealthy competition, bankers are openly admitting that they are under tremendous pressure to cut costs and upscale their operations. But with the increasingly gloomy outlook of stock market, one of the main sources of capital, promoters are facing trouble injecting additional capital in the financial institutions.



In such a situation, it is encouraging that the central bank has expressed readiness to grant additional time to raise capital if financial institutions aspire to undergo mega merger involving multiple institutions of same or different categories. This relaxation will help them overcome existing problems. Likewise, relaxing the exiting five percent limit on non-performing asset and allowing them to open branches in the post-merger phase is another alluring step. Fast track procedures and allowing financial institutions to upgrade to a higher category upon completion of the merger are other attractive incentives. We believe, these incentives along with tax waiver will enable financial institutions to massively lower the cost, operational and other burdens they would otherwise have been subjected to.



But incentive alone is meaningless if the players turn deaf ears to the offer. Being a promoter and holding a position in board of a bank carries a big meaning in terms of social status in Nepal and unwillingness to sacrifice the posts were the principal reasons for failure of past merger attempts. Instead of locking horns for positions and petty benefits, they must throw their weight behind to maximize returns to the institution. Many financial institutions´ promoters have already seen bad days. They must act prudently now and take benefit of the incentives.



The central bank, on the other hand, must act cautiously as well. While pushing for the merger, it must also make sure that promoters of risk-prone financial institutions do not take advantage of the incentives to fulfill their petty interest. The merger should be allowed only after conducting due fitness test of the interested financial institutions. Otherwise, it will be a tactful act of transferring risk of small institutions to a unified larger institution that could ignite another problem in the industry. Hence, the central bank must be alert. If that happened, merger will only do good to Nepal’s financial sector.

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