NRB withdraws 'forceful merger' provision

REPUBLICA
KATHMANDU, Mar 12: Nepal Rastra Bank (NRB) has withdrawn a clause on ´forceful merger´ that it pushed in the new regulation drafted recently, after bank promoters seriously challenged the central bank to assure them that the provision will not be abused.

In the draft of Merger and Acquisition Regulations, NRB had incorporated a provision going by which the central bank could force two or more banks and financials to undergo merger, if it deemed appropriate.


The central bank had clarified that the clause would be activated only in cases of institutions facing problems to comply with capital and other basic prudential norms and witnessing rapid deterioration of financial health.

The idea behind incorporating such a provision was to gain legal ground, whereby the central bank could take forceful steps to revive sick institutions, instead of liquidating them, said a source.

“We´ve decided to drop the provision now,” the source told Republica.

“Experts raised a number of questions over its possible abuse, and given the nature of our market, we too felt their concerns were genuine.”

The promoters and top executives of the banks and financial institutions had mainly highlighted behavioral problems in the market and undue influences that players at times make in the policymaking bodies, while arguing chances of abuse. They also referred to the present lack of ´check and balance´ mechanism in the supervisory framework of NRB, citing that in such a situation the clause could be misused, leaving promoters unfairly disadvantaged.

Along with the revocation of the clause, the central bank has also preferred not to elaborate on incentives it could pledge in order to encourage merger and acquisition.
“There will be a provision that will say the central bank can provide different incentives to motivate merger. But there will not be further elaborations,” said the source.

Previously, the central bank had mentioned different incentives it could grant to inspire merger in the regulations itself. Under this, it had mainly promised relaxation on provisions related to capital adequacy ratio, deprived sector lending, single borrower limit, credit-deposit ratio for certain time to the BFIs undergoing merger and acquisition.

Despite the changes in approach, NRB officials said the central bank will offer all possible incentives, mainly as merger and acquisition has become pretty necessary.
NRB of late has laid special focus on merger and acquisition of BFIs and in a bid to encourage them, it has already made the government announce waiver of capital gains tax (CGT) on transactions related to merger and acquisition.

The facility was announced in the budget for the current fiscal year. Along with the fiscal incentive, the central bank has also promised decent incentives to the BFIs to encourage their promoters for merger and acquisition.