Budget encourages Merger and Acquisition

KATHMANDU: The budget for the fiscal year 2010-11 has tried to encourage the merger of banks, financial institutions (BFIs) and insurance companies however the experts find the incentives not being lucrative enough.

As complementary to the monetary policy, the budget has made the provision of taxing assets and liabilities as disposal after merger to make it non-taxable.

Also, special arrangements have been made in the context of share holders, managers and employees, according to the budget.

Earlier, this fiscal year’s monetary policy had also supported and presented the idea of merger and acquisition as an alternative of establishing new financial institutions. The experts have been voicing the opinion that the financial sector is already over-crowded but unable to increase the outreach thus merger of two financial institutions might be more sensible in the present economic and financial circumstance.

The central bank has encouraged the merger saying it will facilitate the capital requirement of the financial institutions and reduces their operational costs as well; moreover, it will be creating space in already crowded financial sector.

The bankers had expressed time and again that the idea of merger is definitely better however the complications regarding tax emerged as the discouraging factor.

Bankers are not pleased with the incentives provided by the budget to encourage merger. “The incentive for merger is not enough,” said Sashin Joshi, president of Nepal Bankers’ Association (NBA). “If provisions such as, reduction of tax rate of the merged institutions should have been reduced by 20 per cent for three years, then the BFIs would have more interested in merger,” he pointed out.

The government has decided to restructure Department of Revenue Investigation as ‘Department of Revenue and Money Laundering Investigation’. The decision will also draw flak as it might create more problems in the liquidity starved financial sector. Since the implementation of Anti-money laundering Act, the deposits have been declining as many depositors hesitate to disclose the income source suspecting the government’s ulterior motives.

Now, the depositors might feel more insecure to deposit bigger sums as they do not want revenue department to pry into their income sources.

“The merging of revenue and money laundering investigation should have been avoided,” he added, adding that the concept of the rating agency floated by the budget is a welcome one.

The budget has assured to make the legal provisions to set up the much needed credit rating agency and to promulgate law for the effective regulation and supervision of futures and commodities’ markets.

Likewise, the budget has also extended the coverage of Small Deposit Guarantee Programme for the deposits up to Rs 200,000 to ‘B’ and ‘C’ class financial institutions – development banks and finance companies, as well. The programme was initiated last year for the ‘D’ class financial institutions – microfinance service providers.

The government has also planned to invest additional Rs 250 million in the Deposit and Credit Guarantee Corporation to increase its authorised capital to Rs 2 billion.

The absence of both credit rating agency and deposit insurance agency has been considered accountable for the lack of interest of international banks to come in Nepal.

Similarly, the decision to allow NRNs to invest in Nepali capital market that is being haunted by excessive supply can be expected to be salvaged by the involvement of NRNs. “The provisions of framing laws regarding credit rating agencies, commodities market regulations and deposit insurance is commendable,” said economist Dr Chiranjibi Nepal. “However the question is whether or not they will be implemented,” he added, citing the example of mutual fund regulation that took longer than budget had planned.

The financial statement for the current fiscal year also informed that the government has also allocated the necessary capital contribution to establish Infrastructure Development Bank with the participation of the private sector.

http://www.thehimalayantimes.com/fullNews.php?headline=Budget+encourages+Merger+and+Acquisition&NewsID=266445