TRIBHUWAN UNIVERSITY

FACULTY OF MANAGEMENT UNIQUE COLLEGE OF MANAGEMENT

PROJECT REPORT ON STUDY OF BANK MERGING PROCESS AND POLICY IN NEPAL Submi !" B# K$bi $ Tu%$"&$' R(%% )(* TU R!+i, '$ i() )(* U)i-u! C(%%!+! (. M$)$+!m!) BBS /'" Y!$'

TRIBHUWAN UNIVERSITY FACULTY OF MANAGEMENT

RECOMMENDATION

This is to certify that the fieldwork assignment report:

Submitted by: KABITA TULADHAR BBS IIIrd Year OF 2070 B.S. Symbol No: TU Registration No: Entitled A STUDY ON BANK MERGING PROCESS AND POLICY IN NEPAL has been prepared as approved by this department. This fieldwork assignment report is forwarded for examination.

Head o t!e "e#artment UNI$U% &O''%(% OF )*N*(%)%NT

A01)(2%!"+!m!)
I am +ery m,-! obliged to my tea-!er )r. or #ro+iding me s,-! a .onder ,l -!an-e to en!an-ing my s/ill on #ro0e-t . I am gratit,de to &!air#erson and 1rin-i#le o Uni2,e &ollege o )anagement and all my -olleag,es .!o !el#ed me and gi+ing me +al,able s,ggestion. *ll t!e #ersonals .!o !a+e #ro+ided +al,able arti-les on .eb and ne.s#a#ers are !ig!ly a##re-iated and es#e-ially t!an/s to Ne#al Rastra Ban/ or its +al,able in ormation on its o i-ial site ....nrb.org.n#

Table o &ontents
T#3! 0&$3 !' i %! 4%!5!% 678888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888886 Ty#e -!a#ter title 3le+el 24..........................................................................................................2 Ty#e -!a#ter title 3le+el 54......................................................................................................5 T#3! 0&$3 !' i %! 4%!5!% 678888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888889 Ty#e -!a#ter title 3le+el 24..........................................................................................................6 Ty#e -!a#ter title 3le+el 54......................................................................................................7

P'!.$0! T$b%! (. C() !) 68 I) '("u0 i()

686 M!'+i)+ 3'(0!,, )erging #ro-ess is t!e amalgamation or ,sion o t.o se#arate ban/s into a single legal entity. In a merger8 t!e merging ban/s -ombine to orm a ne. ban/. T!e assets and liabilities o t!e merging instit,tions #ass to t!e S,--essor Ban/8 ,nless ot!er.ise #ro+ided by -ontra-t8 and t!e merging instit,tion3s4 are sim,ltaneo,sly and legally dissol+ed. S!ares or bot! instit,tions are s,rrendered and ne. s!ares are iss,ed in t!eir #la-e. T!e ne. ban/ ormed is a se#arate legal entity and t!e RB) s!all iss,e a ne. ban/ing li-ense ,#on a##ro+al. *--ording to 9i/i#edia8 M!'+!', $)" $0-ui,i i(), 3abbre+iated M:A4 is an as#e-t o -or#orate strategy8 -or#orate inan-e and management dealing .it! t!e b,ying8 selling8 di+iding and -ombining o di erent -om#anies and similar entities t!at -an !el# an enter#rise gro. ra#idly in its se-tor or lo-ation o origin8 or a ne. ield or ne. lo-ation8 .it!o,t -reating a s,bsidiary8 ot!er -!ild entity or ,sing a 0oint +ent,re. 68; A0-ui,i i() 4$%,( '!.!''!" ( $, $ T$1!(5!' (' Bu#(u 7 Is t!e #,r-!ase o one ban/ by anot!er or -as!8 e:-!ange o s!ares or a -ombination o bot!; *n a-2,isition ta/es #la-e .!en an *-2,irer ta/es o+er t!e -ontrolling s!are!older interests o anot!er ban/ing instit,tion. *t t!e end o t!e #ro-ess8 t!ere e:ist t.o se#arate -om#anies: t!e *-2,irer and t!e S,--essor Ban/. From a legal #oint o +ie.8 t!e Target Ban/ -eases to e:ist as t!e b,yer s.allo.s its b,siness.5 In t!ese (,idelines8 a-2,isition in-l,des #,r-!ase o <0.0 #er-ent or more o t!e interests=s!ares o a ban/. 68/ FACTORS INFLUENCING MERGERS AND ACQUISITIONS T!ere are many a-tors t!at -an in l,en-e merger or a-2,isition de-isions by b,siness entities. *mong t!em are t!e ollo.ing:

<. "esire to attain e-onomies o s-ale 2. (ro.t! in mar/et s!are8 5. 9is! to enter a ne. more gro.t!>oriented mar/et ?. "esire to in+est e:-ess -a#ital8 6. 'a-/ o management s,--ession 7. Inability to /ee# ,# .it! -!ange e.g. te-!nology8 689 T#3!, (. M!'+!', <.?< Hori@ontal mergers: t.o -om#anies in t!e same ind,stry <.?2 Aerti-al mergers: along t!e +al,e -!ain o a good=ser+i-e <.?5 1rod,-t>e:tension: a--ess to -om#lementary #rod,-ts <.??)ar/et>e:tension: a--ess to -om#lementary mar/ets <.?6&onglomerate mergers: di erent ind,stries *mong t!em Ban/ and inan-e merging #ro-ess is Hori@ontal mergers 68<Ob=!0 i5!, T!e main ob0e-ti+es o t!is st,dy are as ollo.s <. To /no. !o. Ban/s and Finan-e Instit,te 3BFIs4 are merged 2. To st,dy and e+al,ate t!e ban/ merging #oli-y. 5. To dig o,t -a,se o ban/ merging and its e e-ts on ban/ and e-onomy ?. To elaborate details o ban/ merging #ro-ed,re and its limitations

;8 LITERATURE REVIEW
*s #er t!e NRBBs latest data8 t!e -o,ntry !as 5< -ommer-ial ban/s8 C7 de+elo#ment ban/s8 C0 inan-ial -om#anies and 2< mi-ro> inan-e -om#anies. T!e n,mber s!o.s t!at t!ere is to,g! -om#etition among ban/s and inan-ial instit,tions 3BFIs4 or-ing t!em to a-e m,lti#le -!allenges. T!e ma0or one is s,rely t!e -a#ital base. T!e introd,-tion o merger #oli-y !as -reated o##ort,nities or ban/s to in-rease t!eir -a#ital base. *t t!e same time8 t!e BFIs are also going a!ead .it! Initial 1,bli- O erings 3I1Os4 to in-rease t!eir -a#ital base. In t!is iss,e8 Ne. B,siness *ge tries to #resent an o+er+ie. o !o. t!e Ne#ali ban/ing se-tor is going abo,t .it! mergers and I1Os.

100 80 60 40 20 0 totaN um ber com m ercia l ba nk Dev elopm ent B a nk s F ina ncia l Com pa nies Micro fina ncia l Com pa nies

ig: &!art S!o.ing no. o BFIs in Ne#al

",ring 20<2=<58 merger a-ti+ities among BFIs ,rt!er a--elerated. T.o -ommer-ial ban/s merged .it! ea-! ot!er or t!e irst time in 20<2=<5. ",ring t!e re+ie. #eriod8 ,rt!er8 t.o de+elo#ment ban/s merged into one -ommer-ial ban/. Similarly8 by merging ten de+elo#ment ban/s and t.el+e de+elo#ment ban/s and t.o inan-e -om#anies .it! ea-! ot!er8 se+en ormed. * ter t!e inan-e -om#anies !a+e been

im#lementation o D)erger Byla.8 20<2D8 ?5 BFIs merged into <C instit,tions and <5 BFIs !a+e re-ei+ed t!e letter o intent to merge into 6 instit,tions. In addition to t!is8 t!e NRB !as already #ro+ided t!e letter o intent to orm one national le+el r,ral de+elo#ment ban/ by merging 6 regional r,ral de+elo#ment ban/s.

;86 C$u,! $)" E..!0 (. BIF, M!'+i)+ $)" A0-ui,i i(), Follo.ing are t!e main &a,se o Ban/ and Finan-e merging <. &a#ital Base

/8 BANK MERGING PROCESS

P'(0!,,

98 BANK MERGING POLICIES

T!e 1ro-ess o )erging and *-2,isition is not a easy tas/. It needs time and lots o "is-,ssion and e:er-ise. T!e standard ste#s or a merger #ro-ess .!i-! is as ollo.s: <. Initial "is-,ssion and Synergy %:#loration Finan-ial synergy gained by t!e -ombined irm is a res,lt o n,mber o bene its .!i-! lo. to t!e entity as a -onse2,en-e o a-2,isition and merger. T!ese bene its may be: C$,& ,%$01 T!is is .!en a irm !a+ing n,mber o -as! e:tensi+e #ro0e-ts a-2,ires t!e irm .!i-! is -as!>ri-!8 t!,s enabling t!e ne. -ombined irm to en0oy t!e #ro its rom in+esting t!e -as! o one irm in t!e #ro0e-ts o ot!er. D!b 0$3$0i # I t!e t.o irms !a+e no or little -a#a-ity to -arry debt be ore -ombination8 it is #ossible or t!em to 0oin and gain t!e -a#a-ity to -arry t!e debt t!ro,g! de-reased gearing 3le+erage4. T!,s -reating +al,e or t!e irm8 as "ebt is t!o,g!t to be a -!ea#er so,r-e o inan-e. T$> b!)!.i , It is #ossible t!at one irm !as ,n,sed ta: bene its .!i-! mig!t be ,tili@ed against t!e #ro its o t!e ot!er a ter -ombination t!,s res,lting in less ta: being #aid. Ho.e+er t!is greatly de#ends on t!e ta: la. o t!e -o,ntry. 2. 1reliminary Aal,ation T!e i+e most -ommon .ays to +al,e a b,siness are

asset +al,ation8 !istori-al earnings +al,ation8 ,t,re maintainable earnings +al,ation8 relati+e +al,ation 3-om#arable -om#any E -om#arable transa-tions48 dis-o,nted -as! lo. 3"&F4 +al,ation

5. Formation o Steering &ommittee and )oU signing ?. Steering &ommittee engages )E* ad+isor 6. ""R=B,siness Aal,ation E S.a# Ratio T!e ratio in .!i-! an a-2,iring -om#any .ill o er its o.n s!ares in e:-!ange or t!e target -om#anyFs s!ares d,ring a merger or a-2,isition. To -al-,late t!e s.a# ratio8 -om#anies analy@e inan-ial ratios s,-! as boo/ +al,e8 earnings #er s!are8 #ro its a ter ta: and di+idends #aid8 as .ell as ot!er a-tors8 s,-! as t!e reasons or t!e merger or a-2,isition. For e:am#le8 i a -om#any o ers a s.a# ratio o <:<.68 it .ill #ro+ide one s!are o its o.n -om#any or e+ery <.6 s!ares o t!e -om#any being a-2,ired. T!is -an also be a##lied as a debt=e2,ity s.a#8 .!en a -om#any .ants in+estors to trade t!eir bonds .it! t!e -om#any being a-2,ired or t!e a-2,iring -om#anyFs o.n s!ares. 7. &om#re!ensi+e *ssimilation 1lan 7. 1re and 1ost )erger B,dget C. )erger S-!eme #re#ared and illed .it! &RO

<. Initial "is-,ssion and Synergy %:#loration

98 BANK MERGING POLICIES

% e-t o )erger 1oli-y in Finan-ial Instit,tion

<. (lobal Ban/8 I)% Finan-e E 'ord B,dd!a Finan-e -om#any merged toget!er and is in o#eration asG%(b$% IME b$)1

2. )a-!a#,-!-!re Ban/ and Standard Finan-e merged to establis! a better e2,ity basedM$0&$3u0&0&'! B$)1. 5. Aibor Bi/as! Ban/ E B!a0,ratna Sa+ing E Finan-e &om#any merged and is in o#eration as Vib(' B$)1. ?. Udd!am Bi/as! Ban/ and 1as!,#ati "e+elo#ment Ban/ merged and ormed A>i, D!5!%(3m!) B$)1. 6. Gast!amanda# "e+elo#ment Ban/ and Si/!ar Finan-e merged and o#erating as K$, &$m$)"$3 D!5!%(3m!) B$)1 7. S.asti/ Finan-e and In rastr,-t,re "e+elo#ment Ban/ in merged and o#erating as I).'$, 'u0 u'! D!5!%(3m!) B$)1 . 7. N)B Ban/ E &lean %nergy Ban/ signed )OU and !a+e a##ro+ed t!e #ro#osal rom t!eir res#e-ti+e *() C. Him-!,li Bi/as! ban/ and Birg,n0 Finan-e merged and be-ame H : B D!5!%(3m!) b$)1 H. *l#i- %+erest Finan-e8 B,t.al Finan-e and &)B Finan-e are merged to orm S#)!'+# Fi)$)0!8 <0. B,siness "e+elo#ment ban/ and Uni+ersal Finan-e merged and branded as U)i5!',$% Bu,i)!,, D!5!%(3m!) B$)1. <<. Im#erial Finan-e E 1remier Finan-e are in #ro-ess o merger <2. *nna#,rna Bi/as Ban/ E S,ryadars!an Finan-e merged to be-ome Su3'!m! D!5!%(3m!) B$)1 <5. Ne#al Sri 'an/a )er-!ant Ban/ing E Finan-e merged .it! NB B$)1 <?. N$'$#$)i N$ i()$% Fi)$)0! emerged rom Narayani Finan-e and National Finan-e and aiming to ma/e it a strong e2,ity based de+elo#ment ban/. <6. N"%1 and Hama Finan-e !a+e initiated merging #ro-ess. <7. Res,nga Bi/as! Ban/ and S!ine "e+elo#ment Ban/ merged and ne. ban/ is named S&i)! R!,u)+$ D!5!%(3m!) B$)1. <7. Bages!.ori "e+elo#ment Ban/ o Ne#alg,n0 and S!angrila "e+elo#ment Ban/ o 1o/!ara initiated t!e merger #ro-ess and re2,ested N%1S% to !alt trading o t!eir sto-/ transa-tion

<C. NI& Ban/ and Ban/ o *sia are in merger #ro-ess and !as -alled *() to inali@e t!e #ro-ess and inali@e t!e ne. name. <H. *s #er t!e mar/et so,r-es8 I'F& and (rand ban/ is in line or merger #ro-ess. 20. In rastr,-t,re "e+elo#ment Ban/8 )ana/amana "e+elo#ment Ban/8 Aalley Finan-e and Yeti Finan-e are in #ro-ess o merger to strengt!en t!eir base. 2<. (or/!a Finan-e and 1r,dential Finan-e !a+e de-ided merge and are initiated its #ro-essing *ll toget!er8 ?7 ban/ and inan-ial instit,tions are in t!e #ro-ess o -!anging o#erating stat,s and establis!ing 22 ban/ E inan-ial instit,tions. In t!e -ro.d8 t!ere are 7 -ommer-ial ban/s8 <7 de+elo#ment ban/ and 25 inan-e -om#anies. One -an -onsider t!ese de+elo#ments as #ositi+e im#a-t o t!e NRB #oli-y on strengt!ening t!e Finan-ial Instit,tions

)a0or 1ro+isions o )erger By>'a. <. 2. 5. I*B8 IBB and I&B -lass inan-ial instit,tions -an merge into ea-! ot!er. I"B -lass FI -an merge .it! anot!er I"B -lass FI only. FIs t!at .ant to merge s!o,ld orm a se#arate merger -ommittee and sign )emorand,m o Understanding 3)oU4. T!e d,e #ro-ess in-l,ding )oU s!o,ld be -om#leted be ore a##lying to t!e Ne#al Rastra Ban/ 3NRB4 or 'etter o Intent 3'oI4. NRB s!o,ld !old a meeting .it!in <6 days o re-ei+ing 'oI a##li-ation. ?. 6. 7. NRB de-ides .!et!er to iss,e 'oI or not a ter -ond,-ting dis-,ssions and detailed st,dy o -on-erned instit,tions. ",e "iligen-e *,dit s!o,ld -om#lete .it!in si: mont!s o re-ei+ing 'oI rom t!e -entral ban/. T!e detailed a-t,al re#ort -om#rising assets and liabilities o -on-erned instit,tions s!o,ld be s,bmitted to t!e NRB.

7. C. H.

&o#y o t!e de-ision regarding name8 address and s!are ratio o -on-erned inan-ial instit,tions s!o,ld be s,bmitted to NRB. *-tion #lan o -on-erned inan-ial instit,tion in-l,ding date o o#eration a ter merger #ro-ess is -om#leted s!o,ld be s,bmitted to NRB. Ot!er do-,ments as #res-ribed by t!e NRB s!o,ld be s,bmitted to NRB.

6?8 F$0i%i i!, .(' M!'+!' <<. T!e ne. reg,lations !a+e #ledged rela:ation on #ro+isions or -a#ital str,-t,re8 s!are!olding limit or #romoters8 -redit>de#osit ratio8 borro.ings limit or #romoters and de#ri+ed se-tor lending8 among ot!ers. <2. I t!e merger -a,ses in-rease in t!e s!are!olding #er-entage o any #romoter beyond t!e sti#,lated limit8 s,-! #romoters get i+e years time to bring do.n t!eir sta/e .it!in t!e limit. <5. 'i/e.ise8 merged instit,tions are allo.ed additional t!ree years to bring &" ratio do.n to t!e o C0 #er-ent. Similarly8 #romoters get additional t!ree years to bring t!eir borro.ing 3loans4 do.n to less t!an 60 #er-ent o t!e total s!ares t!ey !old in t!e merged BFI. <?. In a bid to l,re BFIs to merger8 t!e -entral ban/ !as e+en #romised a dis-o,nt in re inan-e rate by one #er-entage #oint to t!e merged instit,tion. It !as also o ered to lo.er #enal rate on standing li2,idity a-ility by !al or t!ree years in -ase t.o or more BFIs merged into one. <6. T!e -entral ban/ !as also o#ened ,#grading o ianan-ial instit,tions rela:ed t!e

restri-tion on ,#grading o a BFI to en-o,rage merger. * BFI -an ,#grade to !ig!er -ategory 3-ategory I&B to IBB and rom IBB to I*B4 i t!e instit,tion see/ing to ,#grade is ormed t!ro,g! a merger4. <7. T!e r,les also #romise to re-ommend to t!e go+ernment or e:em#tion o ta:es in -ase a BFI a-es losses d,ring t!e -o,rse o merger a-ilities in-l,de t!e time

d,ration o ,sing S'F .ill be e:#anded to 50 days rom t!e e:isting 6 days or t!ree years a ter -om#letion o merger #ro-ess. NRB -an #ro+ide ot!er a-ilities a--ording to t!e need o t!e ban/s. 6@8 C&$%%!)+!, (. T'$),i i() <C. )ost o t!e -ons,mers do not get sense o transition o ban/s merger be-a,se in an ideal -ase8 all ban/ing ser+i-es -ontin,e to ,n-tion normally e+en d,ring t!e transition. *T) -ards .or/8 -!e-/s -ons,mers .rite do not bo,n-e and -ons,mers .ill be able to get t!e all ser+i-es. <H. Ho.e+er8 ban/s a-e se+eral #roblems d,ring t!e transition. *mong ot!ers ma0or -!allenges o merger are as mentioned belo.: ;?8 68 B'$)" N$m! 2<. T!e identity o t!e instit,tion in t!e mar/et is t!ro,g! t!e brand name. T!e image o an entity is 0oining .it! a brand image. So8 t!e settlement in t!e brand name o t!e ne.ly ormed merged entity is essential. ;;8 ;8 C(m3(,i i() (. b($'" (. "i'!0 (', 4B(D7 $)" ,&$'!&(%"!', 25. T!e ma0or de-ision ma/ers in any entity are t!e board o dire-tors and t!e s!are!olders. I t!e dis#,tes arise among t!ese #eo#le8 t!e #er orman-e as .ell as t!e ,t,re o t!e entity .ill be dire-tly !am#ered. So8 t!e n,mber as .ell as t!e #ersons t!at s!o,ld re#resent at t!e Bo" s!o,ld be settled in -ool mind. ;98 /8 S 'u0 u'! (. &! )!2 m$)$+!m!) !$m 26. T!e ne. merged entity -om#rises o t!e management team rom t.o or more di erent entities. So8 -lear +isions s!o,ld be set>,# or ma/ing t!e ne. management team .!i-! -o,ld !andle t!e merged organi@ation in -oming days. ;A8 98 Em3%(#!!, M$)$+!m!)

27. *s t!e organi@ation is merged8 at t!e same time t!e em#loyees also -ome toget!er. T!e ma0or assets any organi@ation is !,man reso,r-es. So8 i t!e merged entity -an not !andle #ro#erly t!e grie+an-es o t!e em#loyees8 t!e sit,ation o dis#,tes may arise. ;B8 <8 O2)!',&i3 Di5i,i() 2H. T!e #roblem o di+ision among t!e o.ners!i# mig!t arise in t!e merged entity. T!e 2,estions o s!are!olding as .ell as ta/eo+er o t!e s!are e2,ity mig!t -reate di+ision among t!e s!are!olders. /?8 A8 B$)1i)+ S(. 2$'! 5<. Aario,s ty#es o so t.are are being ,sed by t!e BFIs or t!e smoot! o#eration. H,ge -ost and e orts !ad been gone in maintain t!e so t.are in an organi@ation. B,t i t!e t.o di erent entities are ,sing t.o di erent ty#es o ban/ing so t.are8 t!e #roblem as .ell as -ost may arise in t!e settlement o t!e boo/s o a--o,nts.

<8 DATA AND ECAMPLES A8 DISCUSSION AND CONCLUSION @8 SUMMARY AND RECOMMENDATIONS B8 APPENDIC D8 BIBLIOGRAPHY

(lobal I)% Ban/ 'td. emerged a ter s,--ess ,l merger o (lobal Ban/ 'td 3an J*K -lass -ommer-ial ban/48 I)% Finan-ial Instit,tion 3a J&K -lass inan-e -om#any4 and 'ord B,dd!a Finan-e 'td. 3a J&K -lass inan-e -om#any4