Nepal Rastra Bank (NRB) is mulling penalising banks and financial institutions (BFIs) which abandon their plan to merge even after jointly applying for a letter of intent suspecting that they may be using the application to buy time and delay boosting their paid-up capital.

Deputy Governor Shivaraj Shrestha said that the central bank has been considering punitive action such as denying them loans from NRB as the lender of last resort, barring them from buying government securities, not allowing them to open new branches and preventing them from distributing dividends for a certain period.

Recently, a planned merger between Machhapuchchhre Bank and Janata Bank did not happen even after the central bank had given them a letter of intent to amalgamate.

Differences arose over the valuation of share prices between the promoters of the two banks with Machhapuchchhre shareholders demanding that the valuation made by a due diligence audit (DDA) should be rejected.

When Machhapuchchhre proposed making a fresh valuation of share prices, Janata Bank refused to do so and the merger plan fell through at the last minute.

“We had invited the two sides to a meeting at NRB in a bid to save the merger plan, but neither wanted to resume negotiations,” said a senior NRB official. The merger process began in January and collapsed in April.

NRB spokesperson Trilochan Pangeni said that abandoning a merger plan after applying for a letter of intent was like treating the central bank lightly. Central bank officials said that the proposed penalty clause would make BFIs more serious about completing the merger process.

The central bank provides loans to BFIs when they are in financial difficulties as the lender of last resort. BFIs which dump their merger plans could lose this facility, and they could be in deep trouble if such a situation arises.

In 2011, NRB injected cash into Vibor Bikas Bank and rescued it from an acute liquidity crunch under Lender of Last Resort Policy 2011.

Lack of adequate government securities could affect the ability of BFIs to receive liquidity against government’s securities. It may make it difficult for BFIs to maintain the statutory liquidity ratio. Bankers, however, maintain that banks should be allowed to decide for themselves whether to merge or not as long as their intentions are good.

Nepal Bankers’ Association President Upendra Poudel said that understanding each other takes time, and new revelations may emerge in the latter part of the merger process which might lead them to pull out of the planned amalgamation.

“If you force banks to merge, such an amalgamation will not lead to better future for the merged entity,” he said.