Mergers and Acquisitions are the daily staple of Financial news currently in Nepal.
Mergers and Acquisitions (M&A) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position. Any Nepalese who is remotely even interested in financial news recently has been hearing that the central bank of Nepal has encouraged mergers in banks and financial institutions of Nepal so what is these mergers and Acquisitions that we have heard so much lately about let us know even more
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What are Mergers and Acquisitions?
Mergers occur when two companies combine to form a new enterprise, and neither of the previous companies remains independent. In other words, two or more companies of similar or supportive nature get together or amalgamate together to make an entirely new company altogether for the purpose of gaining more business or market share among other things.
An acquisition is the purchase of one business or company by another company or other business entity. Specific acquisition targets can be identified through myriad avenues including market research, trade expos, sent up from internal business units, or supply chain analysis. Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity.
History of Mergers and Acquisitions:
Most histories of M&A begin in the late 19th century United States. However, mergers coincide historically with the existence of companies. In 1708, for example, the East India Company merged with an erstwhile competitor to restore its monopoly over the Indian trade. In 1784, the Italian Monte dei Paschi and Monte Pio banks were united as the Monti Reuniti. In 1821, the Hudson’s Bay Company merged with the rival North West Company. From then onwards M&A has been seen as a tool to increase one’s presence in the market or eliminate the competition together since everyone loves profit and little competition.
Mergers and Acquisitions in Nepal:
Nepal Bank Limited (NBL) was established in 1937 and commenced Nepal’s formal financial sector. However, till the mid-1980s Nepal’s financial system remained underdeveloped and concentrated as only state-owned financial institutions were in operation, that were located largely in urban cities. With the adoption of the liberalization regime, the financial system in Nepal witnessed an increase in private sector participation. These policies led to significant growth in financial institutions in the 1990s and 2000s. Despite, BFIs’ rapid growth in Nepal, the banking system was labeled to have a low volume of turnover, high-interest rate sensitivity, wide interest rate spread, inefficient management, and a lack of capacity to finance large-scale projects.
In order to prevent the large-scale domino collapse of Nepalese banks and financial institutions, Nepal Rastra Bank (NRB) introduced Merger Bylaws Policy in 2011 to enhance the capacity of banks for healthy competition among foreign counterparts who were anticipated to enter the market. NRB also introduced various regulatory provisions such as the acquisition bylaw in 2013, which was later integrated into the merger and acquisition bylaw of 2016. The monetary policy of 2015/2016 increased the minimum paid capital by four times for the financial institutions. In 2015, the commercial bank paid up capital was NPR 4 billion, which has increased to NPR 18 billion in 2021.
NRB’s continuous attempt has led to noteworthy progress in reducing the number of BFIs through a merger which has created stability and credibility. The number of BFIs engaged in mergers as of mid-March, 2022 has reached 239, out of which 177 BFIs’ licenses have been revoked. Currently, there are 27 commercial banks, 17 development banks, 17 finance companies, and 66 microfinance institutions. The merger has improved the financial position of weak institutions when merged with a strong institution.
Why are Mergers and Acquisitions necessary?
While the Mergers and Acquisitions have decreased number of BFIs, it will further allow NRB to carry out its supervisory role smoothly. The decrease in the number of BFIs through mergers can reduce unhealthy competition. Furthermore, there is a limited supply of fresh deposits available in the market, causing a liquidity crunch, pushing BFIs to compete to attract deposits by offering higher interest rates, which gives rise to unhealthy competition among each other. Higher competition can reduce lending standards and lower the profitability of banks. Such poor lending standards can impact the stability of the banking system.
Challenges of Good Merger and Acquisitions:
Despite the fact that a merger and acquisitions are usually the ideal solutions to problems faced by the banking sector, it has its own set of challenges. The main challenge of the M&A would be finding the right partner to merge with. The right partner would help achieve long-term goals and the terms of the merger would align the two parties, leading to an easier formation of a newly merged BFI.
Another challenge is the decision to set a swap ratio for the purchase of share during a merger of BFI between the parties, which also pose a challenge. Additionally, M&A has an impact on employees, customers, and various stakeholders who are associated with the two said parties. Employee management is a crucial process after a merger as human resources are the major component of any organization and their work systems and policies may experience fundamental changes.
Disputes can arise during an adjustment period between the employees and management regarding job roles, job security, remuneration, compensation, etc.
Conclusions: Is M&A Essential or just a Hindrance?
For the past many years, mergers and acquisitions of banks and financial institutions have been beneficial. They have resulted in the growth of credit and deposits along with higher earning power and strengthening of risk management capacity. The consolidation of poor-performing banks with strong performing bank have created competitive and standard financial institutions. So the way I see it it is beneficial for both BFI’s and the general public instead of being a hindrance to themselves and to the central bank itself.