The deposit stock of development banks and finance companies has started shrinking, as commercial banks are consolidating with or acquiring smaller financial institutions to meet the new minimum paid-up capital requirement fixed by the regulator.

The deposit of development banks fell by 2.8 percent since the beginning of this year in mid-July to Rs261.3 billion in mid-February, while deposit of finance companies dropped by 15.4 percent to Rs53.3 billion in the same period, shows the latest macroeconomic report of the Nepal Rastra Bank (NRB), the central bank and the banking sector regulator.

“The deposit of development banks and finance companies is falling, as commercial banks are rapidly acquiring or merging with smaller financial institutions to meet the new paid-up capital requirement,” said Krishna Raj Lamichhane, president of the Development Bankers’ Association, an umbrella body of development banks operating in the country. 

The NRB has directed commercial banks to raise minimum paid-up capital from Rs2 billion to Rs8 billion within mid-July. Some of the banks have already met this requirement, but those that are yet to do so are aggressively looking out for development banks and finance companies that could be bought or merged with.

It has been quite some time since the NRB allowed banks and financial institutions to initiate the process of merger and acquisition to strengthen capital bases. But never has this process gained traction like in the recent days. 

As of mid-February, 131 banks and financial institutions, including microfinance institutions, completed mergers and acquisitions. This has led to formation of 42 banks and financial institutions, meaning the total number of institutions in the banking sector has fallen by 89 so far.

“Many of these financial institutions concluded merger process with or were acquired by commercial banks. This has led to reduction in aggregate deposit level of development banks and finance companies,” Lamichhane said, adding, “This, however, should not mean that existing development banks are facing shortage of funds. Those that are in operation have adequate deposit and are in a comfortable position to extend loans.”

As funds are moving away from smaller financial institutions, deposit stock of commercial banks went up by 10.3 percent since the beginning of the fiscal year to Rs1,934.1 billion in mid-February, shows NRB’s latest macroeconomic report.

Among different deposit products launched by commercial banks, fixed deposit segment witnessed the biggest rise in the first seven months of this fiscal year. Fixed deposits of 28 commercial banks jumped 26.8 percent to Rs663.5 billion in between mid-July and mid-February, shows the NRB report. Call deposit of commercial banks also went up by 11.8 percent to Rs381 billion in the seven-month period.