Comments on New Merger Directives for Banking Sector in Nepal

Madhab Raj Ghimire

 -Network Regulation Expert

-LLM, Competition Law

Nepal Rastra Bank (NRB), a regulator just released new directive to facilitate to merge future-going banking and financial institutions (BFIs).

NRB claims that merging in between different financial institutions will upgrade the BFI to the national level and those will be benefited from tax exemption. NRB further claims, small BFIs do have unhealthy competition among them therefore, to reduce regulatory lacuna against small BFI, merger is preference to sustain the financial market. NRB claims result of small numbered BFIs; NRB will find enough time and effective mechanism to regulate as well as monitoring. Giving priority to merge by NRB for small and new entrants it will reduce the operation cost as well as to initiate to obtain less profit through merger only can benefited consumers.

The positive aspect of NRB’s directive is- Directive is not enforcing BFIs to merge but its role would be just to facilitate the merge. The Directive intended goal of merger is trying ‘show case’ of international banking competition. But, BFI initiatives has not been focusing on remote areas, most areas are facing lack of banking access within country. BFIs have not been able to provide the accessible access to the common level of consumers. Neither NRB does not have policy to provide license incentives and banking services, which are not cost effective nor has cross subsidy been discussed to fulfil service of general economic interest to vulnerable consumers.

A directive has given excessive benefit to merger oriented institutions might not be rightful decision for the future prospect, without conducting proper study of market share of dominant market players. This might go for price-squeezing against small market players such as Development Banks and Cooperatives Banks to drive out from the market.

However, bigger banks merger may be able to cooperate with international banks on the norms of competition. The light risk of this directive is for giving priority to same organizing –group to merge and to create larger group will bring risk of oligopoly in financial market. The Directives made little a bit easier to invest by 15% investment same family based is strong participation of diverting the finance to different stake holder seems convincing resolution.

NRB has weakest performance for regulating against Banks that are deliberately capturing the market share of Development Banks, who were providing retail services to consumers. This might not serve the interest of new comers into the market, also will serve the interest of large and monopolised BFIs. Therefore, NRB directives could bring rightful result if there were enough players to provide basic services across the country but without encroaching product market of others as well as market share too.

Finally, before regulating BFIs, there need to be enough players not only to the central level but also regional and local level to provide services. Therefore, in competitive and regulatory view ‘first let there are numbers of small players- than we can regulate the market and again de-regulating processing will start after enough competitors.’ This can only help to thrive our financial market to compete with international banking market players.

mrghimire@hotmail.com