Though the central bank in 2010 adopted the policy of unification of the banks and financial institutions, in the last decade it issued licences to a large number of institutions, aiming to expand financial services to the country’s rural areas.

As a result of what many say the central bank’s lenient policy, a number of banks and financial institutions have cropped up over the years. Currently, there are a total of 151 banks and financial institutions—28 commercial banks, 33 development banks, 25 finance companies, and 65 microfinance institutions. All of them are under the direct supervision of Nepal Rastra Bank.

In 2016, the central bank enforced a capital increment plan, asking commercial banks to raise their paid-up capital on the grounds that there were too many banks. Although the central bank was successful to some extent in reducing the number of Class B and C financial institutions, it was unable to reduce the number of commercial banks.

As part of its new measure to reduce the number of commercial banks, the central bank now aims to impose forced mergers.

Bankers and analysts told the Post that the monetary policy this time should introduce a measure that helps consolidate commercial banks instead of something which forces commercial banks to merge with development banks and financial institutions.

According to them, the existence of commercial banks in large numbers has given rise to unfair competition in the market, directly causing shortages of loanable funds and high interest rates. However, analysts say the central bank should incentivise banks and financial institutions rather than forcing them to merge to yield rewarding results.

Dipendra Bahadur Chhetri, former governor of the Nepal Rastra Bank, said forced merger is not a desirable solution.

“At a time when the Nepal Rastra Bank has failed to play its role of a strong regulator, it has to appear firm to address the issues of credit to core capital cum deposit ratio, excessive spread rate and implementing the interest rate corridor,” said Chhetri.

The CCD ratio imposed by the central bank for banks and financial institutions currently stands at 80 percent, which means a bank cannot extend more than 80 percent of its deposit and core capital as loans. Interest rate corridor is a system for guiding short-term market interest rates by the central bank. It consists of a rate at which the regulators lend to financial institutions and a rate at which it takes deposits from them.

The central bank has asked the banks to maintain the spread rate—the difference between the interest rates on loan and deposit—at a maximum of 4.5 percent, which many banks are not following.

According to Chhetri, when two banks become one, several other aspects come into play. Due diligence audit and management of the working staff are some of the key issues that must be addressed before two banks are merged, he said.

Chhetri also underscored the need for not letting industrialists operate banks.

The central bank itself has been mulling over dismantling the nexus between industrialists and banks.

Speaking at the Kantipur Roundtable on Monetary Policy on July 12, Rastra Bank Governor Chiranjivi Nepal said that the central bank would separate businesspersons and bankers within three years.

Six years ago, then governor Yubaraj Khatiwada, the current finance minister, had also floated the idea. The central bank, however, has failed to implement the plan.

“As there could be a conflict of interest if the portfolio of an industrialist and a bank is held by the same person, dismantling the nexus is a must,” said Chhetri. “The bill on the banks and financial institutions that incorporated the issue three years ago was also manipulated by a group of lawmakers for their vested interest.” Some of the lawmakers who discussed the bill in parliament were bankers.

Nar Bahadur Thapa, former executive director of the Nepal Rastra Bank, said the monetary policy should come up with measures to expand financial inclusion, formalising the informal sector and ensuring competition among the BFIs themselves.

“The central bank should come up with a policy that helps control excess credit the banks are issuing,” said Thapa. “If there is a big gap between deposit collection and the credit flow, it is likely to affect the balance of payments.”

According to Nepal Rastra Bank’s Current Macroeconomic Report, the country’s balance of payments deficit stands at Rs90.83 billion, mainly due to the trade deficit resulting from a whopping rise in the import bills.

Bhaskar Mani Gyawali, who also served as the executive director of Nepal Rastra Bank six years ago, said the central bank adopted the merger and acquisition policy after a number of BFIs landed in financial crisis in the past decade.

“But this is an ad hoc measure and this may not help achieve financial stability,” said Gyawali. “As a regulator, the central bank should find ways to incentivise the commercial banks and give them better options in order to make them choose to merge on their own volition.”

Bankers have been saying that they are not averse to mergers if the Nepal Rastra Bank offers the banks policy incentives.

“The Nepal Rastra Bank can adopt flexible policies in revising the CCD ratio, cooling period of the chief executive officers and capital adequacy ratio requirement of the banks,” said Gyanendra Dhungana, president of the Nepal Bankers’ Association. “Merger is necessary also to check unfair practices. The interest rate war some times ago is one example.”

Commercial banks around seven months ago had raised the interest rate on lending up to 14 percent, despite the central bank’s mandatory 5 percent spread rate in place. A spike in the interest rate on lending had hit the borrowers hard, as they were paying most of their income on debt servicing.

The Nepal Rastra Bank on June 28 had asked the banks to submit their merger plans within the next 15 days. Although some banks appear to be unwilling, they have formed committees in line with the regulator’s instruction.

According to the Rastra Bank records, Citizens Bank has signed a memorandum of understanding to merge with Sahayogi Bikas Bank.

Global IME Bank and Janata Bank Nepal have also signed an agreement to go for a merger. That apart, only a few development banks and microfinance institutions appear keen to oblige to the central bank’s merger drive.

Gunakar Bhatta, director of the research department of the Nepal Rastra Bank, said the merger is one of the many priority measures the central bank is planning to adopt in the upcoming monetary policy.

“The Nepal Rastra Bank is playing the role of a facilitator only,” said Bhatta. “We will assign partners for mergers only to the banks that are struggling financially and are still reluctant to go into a merger.”

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