Wednesday, April 30, 2008

Banks merger in Nepal

This is what Nepal really needs. Five financial institutions have merged to become a commercial bank of 'A' level.

...Five financial institutions — Mahalaxmi Finance Ltd, Birgunj Finance Ltd, Siddhartha Finance Ltd, Butawal Finance Ltd and Himchuli Development Bank — have signed an accord yesterday to merge and upgrade to ‘A’ level commercial bank.

...All the financial institutions are planning to increase their paid up capital to Rs 400 million each to make Rs 2 billion in total required for the upgradation for the commercial banks.

Nepal has more than 20 commercial banks, several development banks, and cooperatives. They are fiercely competing with each other to increase market pie, which as of now seems saturated with urban customers. They have not been able to reach the villages, where most of the population lives and engages in farming.

More mergers are good for the economy because it will help domestic banks consolidate their expertise and market power to fend off sharp competition from international banks, which will be allowed to enter the Nepali financial market in 2010, according the WTO agreement.

Merger and acquisition would help banks effectively compete with international banks, which would come with huge capital, human resource, expertise, and attractive scheme. In principle, this is considered good but at times of crisis and uncertainty, we might not even know how fast savings would fly out of the country, thus worsening the situation (remember Argentinean crisis in 2000, East Asian Crisis in 1997). To avoid the same fate, we definitely need some rational capital control that would rightly address this concern but not temper/distort individual and market incentives too much.