Biger Merger of Banks in Nepal
Biger Merger of Banks in Nepal
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♠ Indra Rijal

 How many is best?

Simply, there is no magic formula. It depends upon economic model, profile of a country, etc. Check credit GDP. Check data of some of the country.  (Area…square km, population:.. million, nominal GDP: USD…billion) …………some random examples : USA has about 5000 banks, UK 320,Austria 550,Denmark 104,Finland 264,France 540,germany 1200,Ireland 300,Italy 300,Norway 140 and Poland 570.

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Is small number of banks best?

 India has around hundred banks, mostly big, the number is small compared to the size of country and economy, their NPA is up to 25%, average 10 % , but big scandals, like Nirav Modi/PNB. In the recent past, bank regulators in USA, Uk, and Australia levied heavy fines running into USD Billions for misconduct to big banks, so, is bigger better?

When NRB came to realize the number was too many…?

Capital raised from Rs 2 billion to 8 billion recently, why rights share was allowed? It was Governor himself who said do not go for merger as far as possible.

Who gave the licence, and why, personal gains for NRB officials? In that time licence rate is 1 crore for commercial banks, 30 lakhs for development banks and 10 lakhs for finance company? Like Kumari Bank case, they could not show 1.5 crore expenses to NRB but NRB mismatch the account. Other recent case is 5% extra payment for recent 10 new life insurance licence, around 70 crore.

Governor is hell bent upon making Malaysia our role model, and since Nepal is an overwhelmingly Hindu majority country, and since cherry picking is not allowed in banking, maybe he also plans to open a Vedic or Hindu  style of banking , any idea what it would be like ?

“D’ class bank licence open till recently, still some in the pipeline, now pressure given to D class banks merger himself. What a shame? Now, NRB came to realise that there are too many banks, how?

Malaysia myth:

Merger in Malaysia was a special medicine for special ailment (disease), such as East Asia meltdown, economic crisis, no such ailment in Nepal, No such disease in Nepal. Nepal have good GDP growth, stable government, inflation in control, all banks have good profits, good business, low NPA etc.

Malaysia is a Muslim majority country, and there are Islamic banks (profit sharing to depositors, no interest received/paid) as well. since  Governor is hell bent upon making Malaysia our role model, and since Nepal is an overwhelmingly Hindu majority country, and since cherry picking is not allowed in banking, maybe he also plans to open a Vedic or Hindu  style of banking , any idea what it would be like ?

It is like a man first time watching a football match, does not know the rules of the game, or how one wins, he claps when a player shoots the ball longest or highest. Same case with our Governor.

CEO’s cooling off period. Is there such system in Malaysia, too?

How big is big enough and is big best?

First economy size, size of individual firms, then size of banks, not the other way round. What matters in banks is not size but healthy ratios (there are so many ratios). Governor is emphasizing on body weight rather than healthy organs.

It is like a man first time watching a football match, does not know the rules of the game, or how one wins, he claps when a player shoots the ball longest or highest. Same case with our Governor.

Governor wants the merger so that Nepali banks will have branches in London, etc. He is day dreaming and cut off from ground reality. What about Nepalese companies in the real sector (trading/manufacturing, etc) getting listed with London or New York stock Exchange? By the way, how many listed companies we have in the real sector (other than hydro)?

The concept of “too big to fail” is outdated, that is, a bank however big may fail. Remember, Lehman Brothers, a bank with USD 700 billion worth of assets that failed, around a decade ago.

Bankers list of 1000 biggest banks, governor urges Nepalese banks to be among them; first fortune 500 companies required, like Apple, Sony, Toyota, LG, Hyundai, GE, ZTE, and Bank of China, Citi Bank, ……; any chances of such things happening. Many smaller banks diversify the risks, in case a bank fails, no big impact.

However, if there are a few but big banks, and one bank fails, the impact will be on the whole economy. The concept of “too big to fail” is outdated, that is, a bank however big may fail. Remember, Lehman Brothers, a bank with USD 700 billion worth of assets that failed, around a decade ago.

Is merger the only way to become big? How much capital?

The biggest Malaysian bank (May Bank) a result of many merger is still 1/3rd the size of biggest Singaporean bank (DBS) with no merger, except for a post office bank?

The first lot of private sector banks (Grind lays now Standard charter bank, Nabil, Indosuez now NIBL) in Nepal were opened with a capital of Rs.30 million. They are now the best and biggest banks without any merger.

The second lot of private sector banks (Everest, Himalayan, SBI etc.) opened with capital of NPR 60 million only, they are also among the best and biggest banks without merger.

But Global IME Bank, Prabhu Bank , Kumari Bank, NCC Bank, Civil Bank and Century Commercial Bank are the banks who have merged / acquired highest number of BFIs, and now look at their size, quality and image (NCC, Kumari, Civil and Century) or their quality of assets and management quality and compliance, image (Global, Prabhu). Lessons to be learned?

Does merger increases capital or lending capacity of banks in aggregate; No; remains the same. At present, Consortium required for financial big projects; very big banks in India, still financing big projects or companies requires consortium.

Is NRB a regulator or agent of business tycoons and bigger banks?

We have doubts, NRB coerces Carteling and price fixing by banks, through NBA and directly. Against the law (competition, promotion and market protection Act 2063 and Bafia) and NRB Directives, illegal and immoral act. It is in favour of big banks and big business tycoons. And the media, the business papers write in praise of that action.

 What a shame? NBA honchos and NRB Governors / EDS should be behind the bars for the crime of price fixing or should be fined for the crime of price fixing. Any principles? Who are they working for? What is their depth of knowledge, or banking / finance/economics?

NRB giver refinance facility ; as a result , big and well connected business houses getting loans at 8%; and the deprived sector borrowers, farmers, retailers forced to pay interest at 18%, on loans taken from D class banks, on top of high commissions.

Coercive price fixing has put newer and smaller banks into problems (scarcity of funds, CCD/liquidity breach, etc.). It is a pre-planned game by the Governor in complicity of tycoons, to put the smaller banks in distress and force them to the fold of bigger banks owned by tycoons, at lower swap rate? And also to help sell the debentures issued by bigger banks at lower rate.

Also ,since NRB lacks foresight and has been unable to properly regulate the banks, NRB should be split into 3 institutions like in many western countries (USA,UK etc).One will give licence, another will regulate them ,third will look after deposit insurance and temporary takeover of distressed banks.

The present arrangement (single regulator) is against the principles of natural justice because the same institution gives licence, issues directives, conducts investigations of wrongdoing, decides penalties and fines and receives the fines.

Is Governor really worried about high interest rate?

NRB giver refinance facility ; as a result , big and well connected business houses getting loans at 8%; and the deprived sector borrowers, farmers, retailers forced to pay interest at 18%, on loans taken from D class banks, on top of high commissions.

The benefit of low rate of 8 % goes to 100 big houses for their capital intensive projects (that is negligible employment generation) and around 2.5 million small farmers, small entrepreneurs who generate most of the employment pay 18 % .

in a recent NBA meeting on merger issue most of the opinions expressed were against the merger citing difficulties / failure of merger in India, Bangladesh, Sri Lanka and elsewhere, but the news fed to the media by NBA president was only positive / in favour of merger. New Goebbels in banking?

The Governor threatens to set the interest rates by himself if banks do not agree for price fixing? What if the rate is set by NRB instead of the banks?  Rate setting was de-regulated around 25 years ago, so legally NRB cannot do so. NRB used to fixed the rates before de-regulation, and the rate used to be around 22% per annum (check the archive)

Governor’s profile

PHD in child labour, should have been working with ILO, Labour Office, etc. Misuse of his academic qualifications. No knowledge of banking, or monetary economics. Right man is in wrong place.

Cooling off period for CEO and DCEO? Logic?

Role model of our Governor’s Malaysia, What about Malaysia? Is there cooling off period of CEO? What about NRB high level officials?

Yes, there is a cooling off period to join banks. Who will take them as CEO of a commercial banks? Well, the very next they retire from NRB, they simply join insurance companies, training centres, or business units owned by banking tycoons whom they had favoured while in office. No conflict of interest? Really?

Goebbels strategy

Goebbels was Hitler’s media (propaganda) chief. His saying “repeat a false thing a hundred times and it would be accepted as true”. Same strategy followed by Governor sponsoring articles/views/news all praising the benefits and necessity of big and mandatory mergers.

This propaganda ,led by two sycophants :  Gyanendra Dhungana, NBA president and Ceo’s of NB bank, look at the sorry state of his bank (NB bank), and Anal raj Bhattarai, a failed banker (former CEO of Commerze and Trust Bank which was hastily merged with Global Bank as he could not run it).

As per a participant, in a recent NBA meeting on merger issue most of the opinions expressed were against the merger citing difficulties / failure of merger in India, Bangladesh, Sri Lanka and elsewhere, but the news fed to the media by NBA president was only positive / in favour of merger. New Goebbels in banking?

Congress background so should have been pro-free market economy. But involved in price fixing and carteling and asks other CEOs not to speak against merger. Why? Dhungana is under moral obligation to follow the Governor’s whims, such as price fixing (which is also hurting his own bank) and merger and carteling and asks other CEO’s not to speak against merger, why? There is a personal reason.

CEO’s are not allowed to continue in the same bank for more than 2 terms; Surendra Bhandari had to leave Siddhartha Bank and Anil shah was not allowed to continue with Mega bank. But surprisingly, Dhungana has continued with NB bank for the third term, Governor allowed him.

Some Problems in banking sector and who / what caused them?

Deposit scarcity

Going only by the size of available deposit, one cannot say whether is big or small. It is a relative term. You have to judge it against the demand for loans…..

What caused it? Low expenditure in development activities by the government (truth hurts; remember NRB Research chief Nar Bahadur Thapa lost his position of Research Chief simply expressing this truth and the Governor could not defend him even though he was the main signatory of the report)

Demand of loans

Demand for loan Increased because  of establishment of all province and local level offices, law order situation, availability of electricity, opening up new businesses ,etc.)

Lending capacity of banks increased due to four fold increase in capital less than two years because of which they are under pressure to increase loans. If more time, say, 6/7 years was given to increase the capital, this problem would not have come. Culprit: Governor.

High Staff movement

Again, the NRB/Government required “A” class banks to open around 360 new branches  all over Nepal, for these branches alone banks needed around  2000 lower level but experienced staff; banks started luring away staff from other banks in big way. Culprit: Governor again as he could not convince the government that “B” or “C” class banks would do, or could not suggest any other alternate way.

Unhealthy practices? What? Who benefits

What unhealthy practices? Any illegal activities by banks? Giving substandard loans? Unjustified loans or over finance? What is the regulator / NRB there for? If the laws or norms are being breached? But any way, no news of actions taken by NRB for any illegal activities by banks?

Bank Directors involved in operational activities, or putting undue pressure on Management.

Is it because there are many banks? Again, effective role of NRB required. Is NRB handicapped, shortage of manpower, lacks financial resources (Do you know, how much profits NRB made)

Is merger the right remedy?

Merger does not create more deposits. Even after big merger, Banks’ lending capacity in aggregate remains the same. Banks have to serve the same level of capital, and pressure to give loans remains the same.

Remember we had 32 commercial banks and so many other B and C class banks some 4/5 years ago and we did not have such problems. The main causes of these problems are huge increase in capital in a very short period and forceful opening of around 360 new branches, that too, in a very short period. Even though the number of BFIs has drastically come down, but the problems have increased. So no connection between these problems and number of banks.

Benefits of merger, as touted

Operational efficiency

That is cost will come down because of merger? Really, and how? Will NRB allow to close branches? What about access to finance? Can the banks lay off staff except, say some CEOs and may be some DCEOs? And how will cost be reduced?

Almost all high level NRB officials including Governor, Deputy Governors, EDs and others have their relatives employed in all of the banks. This bargaining such employment starts when application for bank licencing is filed, when there are vacancies and whenever some bank faces any issues.

Governor says each bank is paying Rs.500 million for IT system (annually?) . Who gave this information to him? In an average, a bank pays around 5 million to 10 million as annual maintenance cost (AMC) for IT other than what they have already paid for purchasing the IT system. The amount already spent for purchase of IT is not refundable even if the banks stop using it. And for AMC, more users (staffs), more branches means more AMC.so no significant cost reduction for it due to merger. And how will cost be reduced under other headings?

Sound Management

Case study: NB Bank/ Bijay Nath Bhattarai? When Bhattarai had Governor and NB group rules the NRB?

Other is how? Even after merge, same people in the board, same in the management, same NRB?

Why NRB is weak in supervision and regulation of Banks?

Almost all high level NRB officials including Governor, Deputy Governors, EDs and others have their relatives employed in all of the banks. This bargaining such employment starts when application for bank licencing is filed, when there are vacancies and whenever some bank faces any issues.

After retirement, many NRB EDs, Deputy Governors immediately join big business houses who own big banks. A clear case of conflict of interest.

Governor and Deputy Governors and EDs are always busy inaugurating branches of banks; why? Do they get some payment also?

Severe shortage of officer level manpower. NRB is full of assistant level staff that is why there are 4 unions in NRB.

Governor even goes to other countries (so far India, UK and Australia) to inaugurate Nepali Bank’s representative office there at the cost of the bank tycoons. (We have also more than half a dozen banks with joint venture with foreign banks (Grind lays now SCB, Nabil, Indosuez now NIB, SBI, Everest, Himalayan, NB, etc.) but governors from UK, France, or India did not come to inaugurate those banks in Nepal. So it is not a standard practice.

They cannot sustain the undue pressure of political parties, business tycoons, and bank chairman. Remember, NCC Laxmi Bahadur shrestha, Ichharaj tamang, Binod chaudhari etc .

Faulty logic of Governor

Governor cites example of one country: Malaysia.

Sample size only one, so faulty. If one draws conclusion from one sample or one example only, you will get absurd examples like (i) smoking is helpful for long life because a man i know was a heavy smoker but lived to be 100 years of age, or (ii) vegetarianism makes a man violent, because everybody knows that Hitler was a vegetarian and he killed millions of people.

What conclusion the Governor will draw from the family split of Ambani brothers in India, because after the split the business of Mukesh grew even larger while his brother Anil  Ambani is facing big financial problems /bankruptcy. So family split good or bad for business growth? Any idea, Mr. Governor ?

So, in order to draw good conclusion, one needs to have large sample size. So why not NRB does conducts study of data of all the bank merger in the world that took place in the past 20 years and draw conclusions.

Malaysia was a special case, mandatory merger was introduced because of their special  problems and such problems are not present in Nepal (we have high GDP growth, stable government, good banks all making good profits, very low level of NPA).

Our problems (delay in construction work, trade deficit, unemployment) are not related with the number of banks in any way. The Governor wants to appoint the CEO’s himself and the rules of the game that the referee cannot choose players, though he can only show them yellow or red cards.

Governor is bent on destabilizing the banking sector, one of the largest tax payer and running highly professionally and transparently.

Probable disadvantages of big merger in Nepal

Supposing that 26 banks merge and become 13 banks (exception; SCB and SBI), around 50% of their branches will overlap, will be in the same place, and as NRB does not allow to close them those branches will have to shifted to some other places.

  1. Since names of banks after merger will change (joining 2 names or giving a new name), then old stationary, hoarding boards, etc. Need to be discarded costing another Rs. 1 billion if not more.
  2. Around 700 branches will be overlapped (supposing all banks take part in merger, and the number of commercial banks comes down to 14). These branches will have to be shifted to new places which will cost around Rs.3 billion. Also, the worth of assets (fixtures, decoration, furniture’s etc.) In the old, abandoned branches will have to sell to scrap vendors at nominal price (otherwise who will buy them?). Every banks will be moving many of its branches. It will cost around Rs. 1.5 billion.
  3. The present problems faced by the banking sector (liquidity crisis, breach of ratios, high staff movement, pressure on loan increase, etc.) have nothing to do with the number of banks.
  4. Remember we had 32 commercial banks and so many other “B” and “C” class banks some 4/5 years ago and we did not have such problems. The main causes of these problems are huge increase in capital in a very short period and forceful opening of around 700 new branches, that too, in a very short period.
  5. So the root cause of the problems lies somewhere else and the Governor prescribes some other remedy. It is like treating symptoms and not the causes.
  6. Following the merger, half the CEOs and maybe some CEOs will leave with golden handshake at the cost of shareholders. Again about 98 directors will also have leave, but how and who? No clear modality, so a chaotic situation will emerge.
  7. Once the MOUs for merger are signed, share trading will be halted and it will take around 1 year to resume. Around 80% listed shares belong to commercial banks. Impact on shareholders?
  8. Work culture mismatch, IT assimilation problems, etc. will cause havoc in the banking sector for at least 2 years.

Conclusions

NRB should issue a white paper highlighting the following points before taking any policy decision on merger:

  1. The assumptions made by NRB for giving licence to 32 commercial banks and hundreds of other B and C class banks in the past and what went wrong with the assumptions?
  2. What made them realize now that the number of banks is high? Any formula for finding out appropriate number of banks, giving examples of other countries?
  3. Why the Governor actively canvassed against merger during the recent increase for capital from Rs. 2 billion to Rs. 8 billion, and allowed rights share issue.
  4. Why NRB was issuing licence to D class banks until recently, but now pressuring them to merge..?
  5. List of problems currently faced by banks in Nepal, and the cost causes of them? Who/What created them?
  6. What is the connection between the problems and current number of banks?
  7. How the big merger will address each of the problems?
  8. Analysis of past 20 year’s data of bank mergers in the world, problems faced, failures etc. instead of citing the single example of Malaysia.
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