Markets are at work in Nepali banking. Under the previous leadership, Nepal Rastra Bank, the country’s central bank, did its best to convince commercial banks to actively pursue mergers and acquisitions (M&A) and was pretty much paid with lip service. The 2019-20 monetary policy went so far as to lay down several measures to encourage banks to tie the knot. One carrot used was letting the board of directors, CEOs and deputy CEOs of merged banks to leave and find another banking job right away; before that, they were restricted by a six-month cooling-off period during which they were barred from working for another bank. This, among other incentives, failed to bear any fruit. Now, things are happening organically.

That said, the Nepal Rastra Bank leadership under Chiranjibi Nepal deserves kudos in getting the M&A ball rolling in some form. In August 2019, for instance, there were 28 commercial banks (Class A), 32 development banks (Class B) and 24 finance companies (Class C). Today, they number 27, 18 and 20 respectively. The primary goal back then was to meaningfully shrink the number of commercial banks. This was not achieved, although Class A banks did acquire quite a few Class B banks, which are much smaller in size. Markets were simply not ready for a wave of so-called big mergers. Thankfully, besides some verbal jawboning and carrot-dangling, Nepal Rastra Bank shied away from wielding a cane to compel them to merge.

Bad policy

That was the right thing to do and remains so today. There is no reason to believe that the current leadership under Governor Maha Prasad Adhikari will deviate from this. Companies should be the ones to decide if and when to merge, not government edicts. When conditions are ripe, mergers will happen. In December 2019, Global IME Bank completed its merger with Janata Bank, bringing the number of commercial banks to 27. Himalayan Bank and Nepal Investment Bank last month announced a merger to become the largest bank. There will be more. The wheels are now in motion. If the rumour mill is right, Nabil Bank with a paid-up capital of Rs13.5 billion is in advanced talks to merge with Nepal Credit and Commercial Bank with a paid-up capital of Rs10.3 billion.

NIC Asia, one of the leading banks on several metrics, including loan book, is under pressure to increase its paid-up capital of Rs11.6 billion. Other banks in the top echelon measured by paid-up capital include NMB Bank (Rs16.3 billion), Prime Commercial Bank (Rs16.1 billion), Mega Bank (Rs14.7 billion), Kumari Bank (Rs13.9 billion), Citizens Bank International (Rs11.7 billion) and Prabhu Bank (Rs11.3 billion). At the other end of the spectrum, 11 of the 27 are in the eight to nine billion range—Sanima Bank, Bank of Kathmandu, Nepal SBI Bank, Sunrise Bank, Rastriya Banijya Bank, Machhapuchchhre Bank, Century Commercial Bank, Nepal Bangladesh Bank, Everest Bank, Civil Bank, and Standard Chartered Bank.

The State Bank of India owns 55 percent of Nepal SBI. Standard Chartered is 70.2 percent owned by the Standard Chartered Group. Punjab National Bank holds a 20 percent equity stake in Everest Bank. FMO of the Netherlands holds 13.7 percent of NMB bank shares. Nepal Bangladesh Bank was set up as a joint venture with IFIC Bank of Bangladesh, where the latter holds three of six board seats. Large ownership by a single entity can pose problems in finding merger partners. As well, Rastriya Banijya Bank, one of the three government-controlled banks, earned Rs3.3 billion in the first nine months; the other two are Agriculture Development Bank and Nepal Bank with Rs2.1 billion and Rs2.3 billion in profit. Combined, the three can turn into a giant.

The Covid-19 factor

Those that are at the bottom of the pecking order are vulnerable. The likes of Century Commercial and Civil, which respectively rang up Rs358 million and Rs503 million in profit in the first nine months, will not be able to go it alone for very long. The only ideal scenario for them is if two or more suitors get into a bidding war. A situation like this can very well occur if boardrooms increasingly fear that their banks are falling behind in the race to get big. Alternatively, the leading ones with solid financials can decide to wait to find out who is swimming naked. The Covid-19 pandemic came out of the left field and has the potential to separate the wheat from the chaff.

Post-pandemic, Nepal Rastra Bank granted borrowers an extension in interest and principal payment. Banks were allowed to restructure and reschedule loans facing difficulty in meeting the payment schedule. The loan loss provision was relaxed. The virus hit the economy very hard. Businesses suffered left and right. But banks are not sitting on loads of bad loans. As of mid-April, the 27 commercial banks held Rs67.9 billion in loan loss provision, which is about flat with Rs67.4 billion as of the end of the last fiscal and down from Rs69.4 billion as of mid-March this year; in the first nine months of the current fiscal, the average non-performing loan ratio stood at 1.4 percent, down from 1.7 percent from a year ago.

In due course, loan loss likely deteriorates. That is when the ones with weak fundamentals will truly have their backs against the wall. Covid-19 could prove to be an opportunity for the well-oiled to snap up the cloggy ones. The past year has been difficult, yet the likes of NIC Asia and Mega are bumping against the credit to core capital plus deposit ratio (CCDR) ceiling of 85 percent. In the end, things are setting up for a day when a few get really big—big enough for the regulators to sound a ‘systemically risky’ alarm bell. It is debatable if the customer wins in this new setup. In the first nine months of the current fiscal, the net interest income of the 27 banks went down 2 percent year-over-year, but net fee and commission income went up 9 percent.