MERGER AND ACQUISITION OF BANKS EFFECT IN NEPAL

By:
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……………. Campus Campus
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T.U. Regd. No.: 7………………
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A Thesis Submitted to:

Office of the Dean
Faculty of Management
Tribhuvan University

In partial fulfillment of the requirement for the degree of Master of Business

Studies (MBS)

Kathmandu, Nepal
March, 2019
 CHAPTER-I
INTRODUCTION

1.1 Background of the Study

Nepal is small as one of the least developed countries by the international economic
standard. The country has one of the lowest levels of per capital income in the world.
Capital accumulation plays an important role in accelerating the economic growth of a
nation, which in turn is basically determined among others, by saving and investment
propensities. But the capacity to save in developing countries is quite low with a
relatively higher marginal propensity of consumption. As a result, such countries are
badly entrapped into the vicious circle of poverty. So the basic problem for the
developing countries is raising the level of saving and thus investments.

In order to collect the scattered savings and put them into productive channels,
financial institutions like banks are a necessity. In the absence of such institutions, the
savings will not be safely and profitably utilized within the economy, and will either
be diverted abroad or use for unproductive consumption or speculative activities.
Banking institutions are inevitable for the resource mobilization and all-round
development of the country.

A bank is a financial institution, which deals with money and credit. Banks collect
money from the public and users. The main business of a bank is to pool the scattered
idle deposits in the public and channel it for productive use. It collects deposits and
invests or lends to those who stand in need for money. Bank, in other words, is a
custodian of money received from depositors. Hence, its responsibility towards the
general public is pretty different than those who are involved in other types of trades
and services.

The business of a modern day bank is not confined in borrowing deposits and lending
advances only, it performs a host of other financial activities, which has immensely
contributed to achieve industrial and commercial progress of each country.
Historically, banks have been recognized for the great range of financial services that
offers checking accounts and saving plans to loans for businesses, consumers and
government.
However, bank service menus are expanding rapidly today to include investment
banking (security underwriting), insurance protection, financial planning, advice for
merging companies the sale of risk management services to business and
consumers, and numerous other innovative services. Banks no longer limit their
offerings to traditional services but have increasingly become general financial
service providers.

After the restoration of democracy, the government has taken liberal policy in
banking sector so different private banks are getting permission to establish with the
joint venture of other countries. Nepal has Nepal Arab Bank presently known as Nabil
Bank as the first joint venture bank. As of mid july 2014, there are altogether 30
commercial banks, 82 development banks, 48 finance companies, 37 micro finance
Companies, 16 NRB licensed saving & credit co- operatives and 38 NRB licensed
NGOs and 3 NRB licensed other institutions with limited financial transaction
authorities are operating its financial services in Nepal. Besides these, co-operatives
are also running in large extent. NRB has stopped licensing new banks & financial
institutions and adopted the policy of merger of existing banks & financial
institutions.

Mergers and acquisitions (M&A) refers to an aspect of corporate strategy, corporate

finance and management dealing with the buying, selling, dividing and combining of
different companies and similar entities that can aid, finance or help an enterprise
grow rapidly in its sector or location of origin or a new field or new location, without
creating a subsidiary, other child entity or using a joint venture. (Kafle 2013)

A merger occurs when two companies combine to form a single company. A merger
is very similar to an acquisition or takeover, except that in the case of a merger
existing stockholders of both companies involved retain a shared interest in the new
corporation. The entire merger process is usually kept secret from the general public,
and often from the majority of the employees at the involved companies. Since the
majority of merger attempts do not succeed, and most are kept secret, it is difficult to
estimate how many potential mergers occur in a given year. It is likely that the
number is very high, however, given the amount of successful mergers and the
desirability of mergers for many companies. A merger may be sought for a number of
reasons, some of which are beneficial to the shareholders, some of which are not.
Most histories of M&A begin in the late 19th U.S. However, mergers coincide
historically with the existence of companies. In 1708, for example, the East India
Company merged with an erstwhile competitor to restore its monopoly over Indian
trade. In 1784, the Italian Monte deiPaschi and Monte Pio banks were united as the
Monti Reuniti. In 1821, the Hudson's Bay Company merged with the rival North West
Company.

The Great Merger Movement was a predominantly U.S. business phenomenon that
happened from 1895 to 1905. During this time, small firms with little market share
consolidated with similar firms to form large, powerful institutions that dominated
their markets. It is estimated that more than 1,800 of these firms disappeared into
consolidations, many of which acquired substantial shares of the markets in which
they operated. The vehicle used were so-called trusts. In 1900 the value of firms
acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from
1998–2000 it was around 10– 11% of GDP. Companies such as DuPont, US Steel,
and General Electric that merged during the Great Merger Movement were able to
keep their dominance in their respective sectors through 1929, and in some cases
today, due to growing technological advances of their products, patents, and brand
recognition by their customers. There were also other companies that held the greatest
market share in 1905 but at the same time did not have the competitive advantages of
the companies like DuPont and General Electric. These companies such as
International Paper and American Chicle saw their market share decrease significantly
by 1929 as smaller competitors joined forces with each other and provided much
more competition. The companies that merged were mass producers of homogeneous
goods that could exploit the efficiencies of large volume production. In addition,
many of these mergers were capital- intensive. Due to high fixed costs, when demand
fell, these newly-merged companies had an incentive to maintain output and reduce
prices. However more often than not mergers were "quick mergers". These "quick
mergers" involved mergers of companies with unrelated technology and different
management. As a result, the efficiency gains associated with mergers were not
present. The new and bigger company would actually face higher costs than
competitors because of these technological and managerial differences. Thus, the
mergers were not done to see large efficiency gains; they were in fact done because
that was the trend at the time. Companies with specific fine products, like fine writing
paper, earned their profits on high margin rather than volume and took no part in
Great Merger Movement. (www.wikipedia.com)

It is beyond doubt that Nepal’s market size as such is very small, and it has not
increased very much in the last five/six years. Therefore, the numerous FIs have to
compete in the small market resulting in financial distortions, including investments
in high-risk areas, which has proved fatal for many of the players. The market forces
have to be reckoned with as far as the financial institutions (FIs) are concerned. It is
true that in recent years there have been many anomalies in the functioning of the FIs,
largely because of the unhealthy competition among them to get their share of the pie.

Nepal Rastra Bank, the central bank, had announced its merger guidelines to
encourage mergers of the financial institutions, because it saw their unsustainable
numbers a problem for their survival itself. Following are the main reasons pushing
the banks & FIs for merger:

 One of the reasons why increasing number of BFIs are combining their units is
to raise their capital base, as it is mandatory for commercial banks,
development banks and finance companies to raise their paid-up capital to
Rs.2 billion, Rs.640 million and Rs.300 million respectively by mid-July
2016.

 Since many promoters do not want to or do not have the capacity to fork out
the additional amount and the option for issuing rights shares is closed, they
are opting for consolidation.

 Banks & FIs promoted by the same business group or promoters are also
applying for merger as the regulator has prohibited cross-holding. For e.g:
Global Bank, IME Finance and Lord Buddha Finance.

 For class ‘B’ and ‘C’ financial institutions, upgrading and expansion in the
area of the operation is one of the most lucrative results of a merger.

1.2 Statement of the Problem

No doubt banks play vital role in economic growth of a country. As being a
commercial institution, a bank always seeks profit from its operations for its survival
and fulfillment of its responsibilities. The major activities of the banks include
mobilization of resources, which involves cost, and profitable deployment of the
resources, generating income. In case the bank fails to generate sufficient returns on
the resources deployed, it is a drain on the company’s resources and the country’s
resources as well.

In Nepalese economy, government owned and privately incorporated banks coexist.

However, the performance of the privately incorporated banks is much better than
those of the government control banks. As such, a large number of banks and finance
companies beside the cooperative societies have mushroomed in the last decade.
Because of the product and services concentrated in urban area only and investment
in non-productive sector, the profit of the banks and financial institutions are found to
be gradually degrading in recent fiscal years. The operation and concentration of
banking activities within limited territory especially in city area has increased cut
throat competition among the BFIs. In this regard, the NRB has directed the BFIs for
merger with appropriate one. Looking into this matter, the study will be focused on
the following research problems:

 What are the effect of the mergers on bank ROA, ROE, EPS and CAR?

 What is the net profit of sample bank after mergers?

 What is the liquidity ratio before and after merger?

 What is the effect of merger on C/D Ratio, NPA, Management team & MPS?

 What is the capital strenght before and after merger?

 What is the impact of merger on Human Resource of the organization?

1.3 Objectives of the Study

The general objective of this thesis is to find out the need & importance of merger of
banks & FIs in Nepal in the present context and its success. The objectives of the
study can be listed out as below:

 To find out the liquidity ratio before and after the merger

 To know the capital strength before and after merger.

 To find out the effect of merger on bank ROA, ROE, EPS, CAR,C/D ratio,
NPA, Management team and MPS.
  To find out the impact of merger on human resource of the organization.

 To find out the net profit of sample bank after mergers.

1.4 Significance of the Study

This research study on the merger practice of BFIs in Nepal will provide the brief
information on presently burning issue in Nepalese financial sector i.e. merger. This
study will provide the answer for the necessity of the merger of existing BFIs in
Nepal. It will provide the answer for how much the present mergers of BFIs are
successful and how much are failure to achieve their objective of merger. The study
will cover the positive aspects of merger as well as highlight the weakness or aspects
remained to be addressed during merger. It will be source of good reference for the
future research study on the topic merger.

The study would have significance to a number of stakeholders. The study would be
of value to investors and firms in having knowledge on the understanding of the
importance of mergers and acquisitions in analyzing company performance. The
study would further provide more insight into the relationship between mergers and
acquisitions and performance of commercial banks which would be of value to
academicians and researchers in the same field.

This study examines the impacts of merger and acquisition on financial institution
performance in Nepal specifically after NRB policy to merge and acquisition. It
would provide good insights for financial sectors on factors to be considered while
going for merger and acquisition. The study would also contribute to the bulk of
knowledge and research as a basis of reference by students for any future study in the
field of mergers and acquisitions.

1.5 Limitations of the Study

Research is a complex process. From conceptualization of the research area to
research design, collecting data, analyzing the data as well as drawing the conclusion,
all stage have some kinds of limitations. So, this study is also not an exception.

Though humble attempt is made to analyze the pre and post merger
financial performance of the selected banks it is difficult to narrate all incidents and
change brought up due to merger and acquisitions.

Secondly, the study is based purely on secondary data which are taken from financial
statement and statistical tools of the case through Internet only and therefore cannot
be denied for any ambiguity in the data used for the analysis.

Finally, only the descriptive research design has been used with only one bank taken
as sample for the study. Comparison is done only for five year before and after the
merger.

1.6 Organization of the Study

The study research has been arranged and segmented into five chapters. 1)
Introduction, 2) Literature Review, 3) Research Methodology, 4) Results, 5)
Summary, Recommendations and Implementation Plan with references and annexes
in the supplementary section. The first chapter is the introduction segment which
explains about the background of the organization and research, problem statement
which analyses the aspect on which research is based, objectives and limitations of the
research. The second chapter is concerned with the literature review explaining views
and ideas of the researchers as well as the conceptual framework on the basis of the
literature. The third chapter is focused on the methodology of the research which
explains about the research design, sources of data and data analysis of the research.
The fourth chapter is the data analysis results section which is focused on the
presentation of the data and analysis of the data. The data are presented on the
tabular form and results are analyzed and interpreted on its basis.
The fifth Chapter is the Summary, Recommendations and Implementation section
which explains about the summary based on the findings of the research, conclusion
based on the interpretations and the viewpoints of the experts, and action plans on
the basis of the findings of the study for the purpose of solving the research problem.
 CHAPTER-II
REVIEW OF LITERATURE

This chapter is to present the overview on the study through the different views and
ideas expressed by the past researches and philosophers on the issue related to the
study. This chapter has presented theoretical literature which explains the theories
related to the merger and the empirical literature which explains the empirical results
conducted by the researchers on the merger and acquisition.
2.1 Theoretical Literature Review
Different theories related to merger and acquisitions have been presented for the
justification of its impacts. Theories have been classified as value increasing and
value decreasing. Value increasing theories focuses on the generation of the synergy
from the M&A.
Differential Efficiency Theory
This theory explains that the merger and acquisition increases the value of the firm as
the firm’s management is strengthen from the merger of other firms and as a result
increases the efficiency of the management of the firm. The firm through merger of
same industry would be benefited as it would mean that company which is merging
with
the other company can expand without much cost because of the efficient utilization
of all
the resources. This theory explains that the company having good potential if merged
could be utilized at optimum level with lower cost and increasing efficiency of the
firm. This theory also explains that the synergy would be gained from transfer of
knowledge, economies of scale and economies of scope.
Financial Synergy Theory
This theory explains that the financial synergy could be gained by the firm through
M&A as the firm could use internal financing at lower costs than external financing.
This would increase the diversification opportunities and lower the cost of capital.
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2.2 Empirical Literature Review
A study by Singh (2013) argues that there exist two main streams in the existing
postacquisition literature, being one as stock market approach measuring stock market
valuation to determine performance and another being accounting data approach
focusing on different ratios to measure performance. The researcher focuses on
accounting data approach with considering 3 years before merger and 3 years after
merger of the companies merged during 2005. With objective of analyzing the M&A
as an effective method of corporate restructuring, the researcher used paired t-test
through statistical tool and concluded that M&A should become an integral part of
long term business strategy as it significantly increase the performance of the firm
after the M&A.(Singh, 2013)
Researchers Owolabi & Ajayi (2013) in the research paper explains about the
financial performance of the banks pre-merger and post-merger in the Nigerian
banking industry. They performed a comparative analysis on the financial efficiency
of banks in the pre-merger and post-merger and acquisitions era in Nigeria. The
researchers studied with the help of gross earnings, profit after tax and net assets of
the selected banks as representation of financial efficiency showed that post period of
M&A was more financially efficient. The researchers’ argument that there is no
significant difference in terms of profit after tax and net assets but there is significant
difference in terms of gross earnings during pre-merger and post-merger period. So,
they support that the M&A could be beneficial and fruitful but banks need to be more
aggressive in the profit drive for improved financial position to reap the benefits of
post M&A (Owolabi & Ajayi (2013)
Another research by Joash & Njangiru (2015) has studied on the effect of merger and
acquisition of commercial banks of Kenya to analyze whether the merger had any
10
effect on the bank’s performance. The researchers were focused to determine the
effects of merger and acquisition on the shareholders’ value and examine the
implications of M&A on profitability with the help of the EPS, ROI and ROE. The
researchers explained that the M&A raised the shareholders’ value of the
merged/acquiring firms as well as concluded that the banks merge with others to raise
the profitability and most of the banks were able to do so. They also explained that the
M&A had resulted to significant positive effect as the banks were able to increase
market share, gross profit and net profit significantly. The researchers explain that
M&A is able to create significant positive impact on the performance after the merger
(Joash &Njangiru (2015).
Similarly, Mitra (2013) in her research paper explains that merger and acquisition
have become the mostly used business strategy to get bigger market share,
profitability and economies of scale in the present context of competition. The
researcher has compared pre and post-merger financial performance of merged banks
with the help of financial parameters like Gross profit ratio, Net profit ratio, Operating
profit ratio, Return on capital employed, Return on Equity and Debt equity ratio. The
researcher supports her views with the argument that the banks can achieve significant
growth in their operations, minimize expenses and eliminate competition which have
been proved by the analysis of different ratios resulting to the improved financial
performance after merger.(Mitra (2013)
Another study by Mondal ,Mihir & Ray (2016) explain that many of the BFIs are
going for M&A to strengthen the organization as well as achieve economies of scale
and scope. The researchers have tried to ascertain the impact of the M&A on the
performance of the bank after merger between Nedungadi Bank Limited (NBL) and
Punjab National Bank (PNB). The researchers through different statistical analysis
11
concluded that post-merger showed significant improvement in the financial
performance. Different ratios like credit deposit ratio, interest income to total income,
etc. showed significant improvement and growth post-merger representing the
significant improvement in the financial performance. They support that through
M&A, the firms have been able to improve their performance as represented by the
different accounting ratios. (Mondal, Mihir & Ray, 2016)
Another research by Nalwaya & Vyas (2012) studied the financial performance of the
ICICI Bank after the merger with Bank of Rajasthan. The study focused on the
analysis of six different financial ratios Operating profit ratio, Net profit ratio, Earning
per share, Debt equity ratio, ROI and DPR of 2006/07 to 2010/11 for the
measurement of financial performance and concluded that the company was able to
attain positive results in the post-merger period and significant improvement was seen
on the financial performance making the merger more fruitful to the shareholders.
(Nalwaya & Vyas, 2012)
Another researcher Kemal (2011) through the study of the financial performance of
Royal Bank of Scotland through different 20 ratios of four years (2006-2009) argues
that the merger could not improve the financial performance. The researcher argues
that only 30% ratios (1 profitability ratio and 5 solvency ratios) were better after
merger while 70%(14 ratios) were not better after merger. The researcher claims that
the M&A could not improve the performance of RBS through merger (Kemal, 2011)
Researcher Masud (2015) analyzed the financial performance of the Allied Bank, NIB
Bank and Faysal Bank of Pakistan after M&A with the help of ROA, ROE, and EPS
and paired sampled t-test. He concluded that the performance of the banks showed
mixed results as some indicators were increasing while some where decreasing. But
he also explained that in loner run overall performance of the banks have shown
12
slightly improved performance with the passage of time even though the performance
in the first year was low. (Masud 2015)
Researchers Yanan, Hamza & Basit (2016) studied 100 sample US companies to
identify the effect of M&A on the financial performance of firms. They used
indicators like ROE, EPS, NPM and sales growth and analyzed with the help of paired
t-test. The study concluded that the M&A helps to increase the profitability and
market share of the firm as it improves the value of the stockholders’ through raising
the demand dividends in the market stock. (Yanan, Hamza & Basit, 2016)
Another research by Sethy (2017) on the financial performance of the State Bank
Group attempted to examine the financial performance of State Bank group during the
merger period. The study focused on the technical efficiency of all the banks using
paired t-test with the help of variables like EPS, PE Ratio, P/BV, and Krushkal Wallis
test. He concluded that the financial performance of the bank has improved. (Sethy,
2017)
Researchers Abdulazeez, Suleiman & Yahaya (2016) studied the financial
performance of the banks of Kenya to know the impact of M&A using the indicators
like ROA and ROE with the help of t-test. The study concluded that the banks
witnessed improved and robust financial performance post-merger leading to more
financial efficiency. ROA and ROE both seems to have grown post-merger leading to
improved financial performance. They also recommended that the banks should be
more aggressive in financial products marketing to increase financial performance in
order to reap the benefit of post mergers and acquisition bid in the Nigerian banking
sector. (Abdulazeez, Suleiman & Yahaya ,2016)
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2.2 Conceptual Framework
The conceptual Framework of the research paper shows the relationship the study is
based on. This study is based on the merger and its overall impact post-merger based
on the variables like profitability, Liquidity and Capital markets.
Figure 1: Conceptual Framework of the study
The conceptual framework explains the relationship between the merger and its
impact on the performance of the bank with the help of different variables i.e. overall
financial indicators of JBNL. The overall financial indicators will be explained by the
changes in the financial performance of JBNL pre-merger and post-merger as well as
the impact due to the merger. The overall financial performance of JBNL will be
explained by changes in different Profitability Indicators(Gross Profit Margin, Net
Profit Margin, Return On Assets, Return On Equity, Average Yield, Non-Performing
Merger Impacts
Profitability
Liquidity
Capital Market
14

The review of literature is taken as an essential part which works as cornerstone of

the study. So that the past studies and their conclusion might be known and help to
conduct further research. It is an integral and mandatory process in research work.
avoid the unnecessary duplication in the research. This chapter is basically
concerned about the abstract regarding the merger of Banks and Financial
institutions. Literature review helps to make the research more realistic. It provides
significant knowledge in the field of research. thus the review of books, research
studies and articles has been used to make clear about the concept of merger.

The purpose of reviewing the literature is to develop some expertise in one’s area to
seek what new contributions can be made and to receive some ideas for developing
research design. It provides foundation to the study.

2.1 Conceptual Framework

2.1.1 Concept of Merger

In simple words, merger is complete absorption of one or more companies by a single
existing company. In other words, it is the process of diluting one or more companies
together to form a new company in a strong way making more competitive. In
Finance, Merger is an act or process of purchasing equity shares (ownership shares)
of one or more companies by a single existing company. The merger contains mainly
two parts: Acquiring Company and Acquired Companies.

Acquiring Company
It is a single existing company that purchases the majority of equity shares of one or
more companies.

Acquired companies: These are the companies that surrender the majority of their
equity shares to an acquiring company.

Merger is a technique of business growth. It is not treated as a business combination.

Merger is done on a permanent basis. Generally, it is done between two companies.
However, it can also be done among more than two companies. During merger,
acquiring company and acquired companies come together to decide and execute a
merger agreement between them.

After merger, acquiring company survives whereas acquired companies do not survive
anymore, and they cease (stop) to exist. Merger does not result in the formation of a
new company. The management of acquiring company continues to lead (direct) the
merger.
Investopedia an online dictionary defines merger as “The combining of two or more
companies, generally by offering the stockholders of one company securities in the
acquiring company in exchange for the surrender of their stock.”

A merger occurs when two companies combine to form a single company. A merger is
very similar to an acquisition or takeover, except that in the case of a merger existing
stockholders of both companies involved retain a shared interest in the new
corporation. By contrast, in an acquisition one company purchases a bulk of a second
company's stock, creating an uneven balance of ownership in the new combined
company.

The entire merger process is usually kept secret from the general public, and often
from the majority of the employees at the involved companies. Since the majority of
merger attempts do not succeed, and most are kept secret, it is difficult to estimate how
many potential mergers occur in a given year. It is likely that the number is very high,
however, given the amount of successful mergers and the desirability of mergers for
many companies.

A merger may be sought for a number of reasons, some of which are beneficial to the
shareholders, some of which are not. One use of the merger, for example, is to
combine a very profitable company with a losing company in order to use the losses as
a tax write-off to offset the profits, while expanding the corporation as a whole.

Increasing one's market share is another major use of the merger, particularly amongst
large corporations. By merging with major competitors, a company can come to
dominate the market they compete in, giving them a freer hand with regard to pricing
and buyer incentives. This form of merger may cause problems when two dominating
companies merge, as it may trigger litigation regarding monopoly laws.

Another type of popular merger brings together two companies that make different,
but complementary, products. This may also involve purchasing a company which
controls an asset your company utilizes somewhere in its supply chain. Major
manufacturers buying out a warehousing chain in order to save on warehousing costs,
as well as making a profit directly from the purchased business, is a good example of
this. PayPal's merger with eBay is another good example, as it allowed eBay to avoid
fees they had been paying, while tying two complementary products together.
A merger is usually handled by an investment banker, who aids in transferring
ownership of the company through the strategic issuance and sale of stock. Some have
alleged that this relationship causes some problems, as it provides an incentive for
investment banks to push existing clients towards a merger even in cases where it may
not be beneficial for the stockholders.

2.1.2 Merger of Banks and Financial Institution

Nepal’s financial sector has gone through a very strange situation. With just a dozen of
commercial banks, development banks and financial institutions, there are now over
200 financial institutions which, one of the other way, have been facing financial
problems. A bank merger occurs when banks join to become one. Many people think
of bank mergers as something that occurs between two banks, but it may involve more
than two in some cases. No matter how many banks are involved, the merger results in
a single bank with one identity rather than multiple banks with multiple identities.
There are two common ways in which a bank merger may be accomplished: one is
through a buyout and another is via cooperation with bank shareholders.

To understand what a bank merger is, it may be helpful to compare it to marriage. A

marriage is the joining of two people while a bank merger is the joining of two or
more banks. When banks merge, the separate banks lose their identities and take on a
single identity. For example, the merged banks may take on the name of one of the
banks involved in the merger or they may create a new name. In many cases, it is
preferable to keep one bank's name for the new identity, as it may have name
recognition value.

The main benefit of a bank merger may be the ability of the merging banks to not
only pool their resources, but also expand their market share. At the same time, the
merging banks may enjoy a decrease in operating costs since they form a single bank
rather than multiple banks with separate operating costs. In many cases, there are tax
benefits involved in a bank merger as well. Unlike takeovers, bank mergers are
typically based on agreements. In most cases, the management and stockholders agree
to allow a merger. These mergers also differ from takeovers in the fact that the change
is usually considered a friendly one, and both banks usually stand to gain in the
joining. With takeovers, the gain isn’t usually mutual.

There are cons to bank mergers as well. In some cases, the merger leads to job loss as
the new bank seeks to cut costs. Likewise, these mergers may sometimes prove
difficult as two or more banks have to work together to minimize disruptions in
operations, systems, and processes.

There are often few changes for shareholders and customers in mergers. Shareholders
are usually offered an equal amount of interest in the bank formed by the merger.
Customers may notice some changes in bank policies, but effort is usually made to
make the change as seamless as possible. For example, bank customers who have
direct deposit set up with one of the banks are often permitted to continue using the
same routing and account numbers. This saves customers the troubles of having their
employers arrange for direct deposits using new account and routing numbers.
(http://www.wisegeek.com/what-is-a- bank-merger.htm)

2.2 Review of Related Studies

2.2.1 Review of Articles and Journals
Shrestha, (2011),in an article entitled “Incentives on Cards for BFIs Opting for
merger”, explained that relaxation in single obligor limit, ownership pattern of the
merged bank, deprived sector lending and branch expansion are some facilities the
NRB is planning to offer BFIs going for merger. The central bank has prepared an
initial draft of the merger bylaw including the incentives to be given to BFIs going for
merger. The central bank will hold discussions with stakeholders before giving a final
touch to the bylaw. An increasing number of BFIs are preparing for merger and they
are waiting for NRB’s incentives.

Singe obligor limit means the maximum lending a bank or financial institution can
make to a single sector. The monetary policy for the current fiscal has provisioned
that BFIs can lend only 25 percent of the core capital in a single sector, including
both fund based (cash) and non-fund based (bank guarantee etc). NRB could ignore
the noncompliance of this provision by a merged institution for a certain period as an
incentive. As per the existing law, a single group cannot hold over 15 percent stake in
a merged institution. However, the central bank may also relax this provision for a
certain period. The central bank may allow a singe group to hold over 15 percent
stake for a certain period.

Branch expansion is another area where the NRB is planning to give facilities.
Currently, BFIs cannot open branch in the Capital until they open two branches
outside, one of which should be opened in a remote district fixed by the government,
according to the monetary policy for the current fiscal year. Merged BFIs will not
have to abide by this rule for the expansion of certain number of branches. The
deprived sector lending is another area where the central bank is planning to give
incentives. Currently, commercial banks will have to lend 3 percent of their total
lending to the deprived sector. Development banks should lend 2.5 percent and
finance companies 2 percent, as per the monetary policy. NRB have proposed
relaxation for a certain period in this provision.

The NRB, however, is not conformable in providing relaxation in risk related issues
such as capital adequacy ratio and provisioning. The central bank is proposing these
incentives after this year’s budget removed the existing provision of taxing assets and
liabilities as disposal.

The main demand of the bankers is the government should provide certain percent of
corporate tax exemption. The government hesitated to provide tax exemption this
year despite the repeated request of Nepal Banker Association.

Poudel (2013), in an article entitled “Bitiya Darpan”, explained about the causes and
reasons for merger of Nepalese banks and financial institutions. He wrote that history
of banking in Nepal was not long and there were around four banks in 2040 B.S
which reached to more than 200 by the end of 2068 B.S i.e. within 28 years. The
liberalization in banking sector has increased this much BFIs. With increment of BFIs
there was not noticed such a good development of other economic indices of
Nepalese economy. In recent, some of Nepalese BFIs have faced several problems
due to lack of corporate governance. Before the great negative impact on total
Nepalese BFIs and economy due to the problems in some low capital base BFIs, NRB
adopted merger strategy. Merger is not only for small low capital based BFIs, it is
necessary for large capital based BFIs also to be more efficient, strong and capital
based BFIs.

It is difficult to standardize the number of BFIs for a economy but it is obvious to

know that at which level the financial market will be competitive or monopolistic.
HHI index is used in America and other countries to measure competition of BFIs.
HHI 1000 is the standard level whereas HHI < 1000 indicates competitive financial
market and HHI > 1000 shows monopolistic financial market. A Survey released HHI
328 for Nepal shows the heavy competitive situation for BFIs in Nepal due to
increased number of BFIs and needs merger of Nepalese BFIs.

Nepal seeks at least ¾ large scale, huge capital based efficient and strong BFIs for
investment in hydropower, industries and infrastructure development. It is not
possible through capital increment by promoters, right issue, bonds & debentures.
Moreover the global context shows the examples of merger of BFIs in the process of
forming strong competitive, adequate capital base efficient banks rather than common
share issue among public or borrowings. So, Nepalese BFIs should go for merger to
form a new strong and efficient bank

The Banker 2009 published list of 1000 banks on which “Master Bank of Mascow”
stood in the 1000th place whose capital base is the sum of top four Nepalese banks
operating presently. BFIs of comparatively low developed countries than Nepal are
listed in the banker’s list. So, for forming strong capital based efficient bank rather
than increase in numbers, Nepalese BFIs have to be merged.

The increased number of BFIs causes difficulty in supervision by monitoring

authority like NRB, the corporate governance in Nepalese BFIs is degraded. Due to it
, BFIs have to be liquidated which negatively affects image of BFIs among public. In
the global context also maintain public trust on BFIs, corporate governance in BFIs
and proper supervision also, supervision authority has forced to merge of BFIs. The
liquidation of Samjhana Finance, Nepal Bikas Banks are the example of it. So, in
order to protect Nepalese BFIs from big crisis, merger is the best.

No one could deny the direct & close relationship of economy & banking. The risk &
problem in banking & financial sector adversely affects the economy of the country
where merger of BFIs is the best remedy from liquidation of BFIs. Merger strategy
was found to be adopted in Japan, Austria, Belgium, Germany in 1920-30 A.D to
protect BFIs from crisis.

Merger of BFIs in Nepal is not 1 stand foremost requirement but it is good to prevent
than cure as the cases of Gurkha Development Bank Ltd., Nepal Share Markets
Company and Oriental Co-operative present the scenario for requirement of merger
of present BFIs of Nepal. Nepalese economy seeks huge capital based, strong,
consistent and large transaction volume bank in financial system. And there is no way
than merger of BFIs for this. Even though there is not such a motivating and highly
successful merger in the history of banking sector but once should not forget the
worst result it could be caused by inability to merge BFIs on time.

Gautam (2014), in an article entitled "Merger movement: For financial Stability"

explains that the number of Financial Institutions (FIs) in Nepal seems high in
proportion to its economic activities and population size. Of late, there are 30
commercial banks, 82 development banks and 48 finance companies in Nepal. All of
them are urban-centric and providing service only to 30 percent of the total
population. Economic growth is still below 5 percent. Some FIs named Capital
Merchant & Finance, Progressive Finance, Nepal Share Market, Nepal Bikas Bank
and Gurkah Development Bank fell prey to the weak supervision and miss corporate
governance. Moreover, state-owned FIs such as NBL, RBB and ADB are
overwhelmed with excessive operating expenses. To operate such institutions in a
new pattern with operating efficiency and cost effectiveness and improved current
financial market are indispensable for Nepal for the stability of its financial system.
Merger, as a consolidation means of these institutions may be an instrument to keep
them in right size and protects the financial sector from system risk.

Nepal Rastra Bank (NRB), the regulatory and supervisory body of banks of Nepal
has, therefore, begun initiating the consolidation process among FIs. There is no
separate act and law yet. However, Company Act 2063 article 177, BAFIA 2063
article 68 and 69 and Merger and Acquisition Regulation 2068 have already come up.
Though such provisions have referred to merger and acquisition, they have not
mentioned their appropriateness to particular institutions that need to be consolidated.
What type of consolidation- merger or acquisition should be in particular institutions
is still unclear. Universal practices of consolidation have shown that it can be done
in term of Merger, Acquisition, and Strategic Alliance. It is, therefore, important to
recognize the difference between bank merger, an acquisition and a strategic alliance
in context of Nepal.

A bank merger is a combination of two banks in which only one survives and other
goes out of existence. All assets and liabilities of the merging company get
transferred to the surviving company. So far, some FIs in Nepal have merged with
each other. For example, the first merger in Nepal happened between Hisef Finance
and Laxmi Bank Limited in 2061 B.S. Similarly, a merger of Nepal Bangladesh
Finance & Leasing into Nepal Bangladesh Bank Limited occurred in 2064 B.S.
Narayani Finance and National Finance merged into Narayani National Finance in
2066 B.S. Moreover, there are a number of banks undergoing merger. For example;
NMB and Clean Energy Development Bank . Not only private sector banks, but also
state- run FIs such as Rastriya Banijya Bank (RBB) and Nepal Industrial
Development Corporation (NIDC) are on line of merger as per NRB’s suggestion.
The capital adequacy, capital plan, credit problem and improvement in operation, and
working efficiency are the root causes behind merger of these institutions.

By contrast, in a bank acquisition, the target (merging) bank retains its bank charter,
CEO and BOD. It becomes just an affiliate member of its bank holding company
(BHC) to which the buying bank belongs. In case of Nepal, bank acquisition has not
taken place so far. However, the chairperson of Khetan Group of Industries, Mr.
Rajendra Khetan, in an interview with an economic newspaper, has expressed his
desire to go for acquisition between the firms of the same group. This is normally
done by one company buying the share capital of another company with the consent
of the existing shareholders or in a hostile manner. In this regard, the U.S. practices
have found mergers as favored means of consolidation, because they are much less
expensive than BHC acquisition.

However, in Nepal, voluntary merger is facing many problems such as the interest of
the promoters and managers in the post-merger scenario, reconciliation of share
capital and branch, appointment of a new CEO and board and human resource
structure. NRB may have, therefore, to take up a forced merger policy by means of
other instrument.

In view of such problems, Nepalese banks should also think of ‘Alliance’ that can
create tremendous value as an alternative to merger and acquisition. Strategic
alliance and collaborative approach can be attempted to reduce transaction costs
through outsourcing, leverage synergies in operation and thus avoid problem of
cultural integration. One example of successful alliance can be cited from the Indian
context, where Indian Bank, Corporation Bank and Oriental Bank of Commerce has
entered in to a strategic alliance since 2006 A.D.

To wrap up, it is high time for Nepalese FIs to choose the best form of consolidation
either merger, acquisition or strategic alliance. This must realize a value through
revenue enhancement, operating economies, and more effective management that
gives rise to synergy. In contrast to the merger initiation on the part of regulators, the
trend of market-led merger between FIs may gain momentum and thereby maintain
financial stability in Nepal.

Styal (2015), in an article entitled “Staffs Management Problem on Merged Banks

and Financial Institutions”, concluded on his article that the management of staffs is
the main problem on the merged BFIs. Prior to merge all the BFIs have sufficient
staffs but with the merger duplication of same level same functional staffs especially
in higher level are the main problem faced by merged BFIs in Nepal. The excess of
lower level i.e. operational level is not the big issue and could be solved easily with
the expansion of branches and added services in the banks.

NRB also accepts this fact but it has shifted the responsibility towards BFIs as the
staffs are their and merging BFIs have to manage themselves. The appointment of
CEO, selection of board members, department heads and managers are the main
issue that influences success or rejection on merger of BFIs. Some of the BFIs have
practiced appointment of more than one higher level staffs even though it could be
operated by appointment of single higher level staff. It is because of merging of BFIs
run under same group and appointed higher level staffs are from nepotism &
favorism. It increased the expenses of the merged BFIs.

Although it claimed that management of lower level staffs in merged institutions is

not big issue, BFIs whose branches are overlapped in many places are still headache
for management. Similarly use of different core banking software in merging BFIs is
the next issue for BFIs going for merger. The transferring customer information into
single CBS is not an easy job. So, some of the merged BFIs of Nepal have parallel
used multiple CBS through multiple IT departments.

It was the fact in Nepal that Nepalese BFIs promoters & higher level staffs had been
practicing of insider lending. The deposit of BFIs is deposited into other BFIs and
uses credit facility from such deposited BFIs in the name of other relatives. But after
force merging of BFIs run under same group by NRB the insider lenders are affected
and came into media.

Pokharel (2016), in an article entitled “Bank Mergers in Limbo Reasons and

Remedies", states that the banks merger is taking place without any planning, vision
and research. The present mergers are not healthy mergers instead it may bring fatal
errors in the economy of Nepal. He advised for prevention within time as merger has
not became problem till now. If one could make it more systematic, planned it will be
more productive. The summary of the article is given below;

Bank merger is something of a novelty in Nepal, but it has a long history in other
countries. Whilst the merger of Laxmi Bank with Hisef Finance in the year 2004 is
the first of its kind in Nepal, such wed-locks of the banks, particularly in the United
States, goes back to the thirties as evidenced by the merger in the year 1930 of
Equitable Trust of New York with J P Morgan and Company, established in the year
1871 in a decade marked by a flood of bank mergers.

The banking sector has to be accorded topmost priority in view of the stellar role it
can play in the economy of the country. But banking has fallen into rough weather in
Nepal as reflected by the collapse of several of them in the recent past. The merger of
the banks has been forwarded as a medicine to this ever growing malady in which
Nepal cannot afford to fail for which suitable measures need to be undertaken right
from the beginning of such campaigns.

The mergers of the banks are initiated for varied reasons such as for cost cutting
through economies of scale, gaining access to a new market, strengthening a
company’s marketing position, global expansion, gaining a talented work force,
acquiring new knowledge and expertise, gaining a new computer base and pursuing
new technologies. The last decade was remarkable for incredible bank mergers
outside Nepal as is evident from some 23000 mergers taking place worth 2.1 trillion $
in 1998 and 9700 mergers in the year 2000 worth 1 trillion $.

However, merger is not always a bed or roses and many a times it also unfolds its
thorny surface like some passionately held weddings, particularly of celebrities, but
so ephemeral that they do not even see off the honeymooning period, for example,
that of Britney Spears and Jason Alexander which lasted for a mere 55 hours. A
study has indicated that some 60 to 80 per cent of the bank mergers have ended up in
fiasco. Though the financial and market forces are at play to lead to such a state, the
neglect of human resources is the most determining factor. The other reasons for this
state of affair are the lack of communication, lack of direct involvement by human
resources, lack of training, loss of key players and talented employees and with it the
loss of customers, corporate culture clash, power politics and inadequate planning.

The generally recognized remedies towards a successful bank merger are extensive
and regular communication, effective planning, retaining key people, managing
cultural differences, training and development, having a good post- merger
integration teams and the likes. For this, there is a need for a good leader who can
yoke both the merging parties together.”

Rayamajhi (2017), in an article entitled “A bad marriage: Bank Mergers in Nepal",

depicts that the trend of mergers among banks and FIs reflects myopic approach that
limits mergers to just physical integration, ignoring the cultural aspect. The summary
of the article is presented below;

When Prithivi Narayan Shah united Nepal as one country in 1769 AD, it was not a
complete integration. Though there was geographical unification of various small
countries, the thoughts, mind-sets and common understanding of people were far
from aligned. At present, the division within political parties, disagreements within
the same group of leaders, contradictory arguments for a common national agenda
and the urge to create a federal state based on ethnic identity, clearly highlights the
incomplete integration process. The integration process overlooked basic softer issues
like alignment of thought processes of different people for national unification.

With the way Banks and Financial Institutions (BFI’s) in Nepal is currently either
merging or in the process of merging, it seems hugely possible that this incomplete
form of integration will be replicated in the financial sector of Nepal as well.

Looking back over two decades, it should be appreciated that the banking sector has
evolved from a total number of seven banks in 1990 to 214 at the end of fiscal year
2011-12. Nepal Rastra Bank (NRB), to ensure deeper penetration, has always readily
issued licenses to new institutions, and has never bothered to revisit the excess supply
of these institutions in urban areas. It was only in 2011 that the NRB decided to come
up with the Merger & Acquisition Regulation for BFIs.

Off late, we have been witnessing merger activities in the financial sector, with eight
such mergers already taking place; Laxmi bank and Hisef being the pioneers even
before the regulation was in place. Other major mergers include the Global Bank-
IME Finance-Lord Buddha Finance merger and the Machhapuchhre Bank-Standard
Finance one. There are dozens more in the pipeline. With the merger of NIC Bank
and Bank of Asia Nepal being touted as the biggest merger in Nepal. If we analyze all
these mergers, we will find common reasons behind them, which in turn will
demonstrate the fiasco that is likely to unravel in future.

These mergers are taking place predominantly at the initiative of promoters, who at
this point are tired of injecting their equity into these institutions in the form of right
shares or ploughing back cash dividends in the form of bonus shares. With the fear of
a hike in the capital requirement slab by the NRB along with a downturn in the capital
market and a stagnant real estate sector, mergers have become a way to increase their
capital base to tide over the present crises and sustain their pockets.

A tighter governance policy for directors and promoters of BFIs regarding personal
loans and executive positions seem to discourage them from holding multiple
shareholding interests in various institutions. Likewise, NRB has been continuously
harping on ‘forced merger’ for promoters of the same group or BFIs with poor asset
quality and performance. All these factors have been leading to, and will continue to
lead to, mergers under desperation in Nepal. The number of banks is likely to go
down in a couple of years because of such mergers, but integration will remain
incomplete since these mergers neglect issues of cultural integration and deeper
problems are likely to crop up in years to come.

A study by Wharton, Harvard and Morgan Stanley reveals that the failure rates of
mergers are 50 to 70 percent globally; 85 percent of the firms that merge do not
achieve the shareholders’ expected value and one of three star performers leave the
institution within one year of the merger. The key reason behind this is the failure to
address the issue of cultural integration. The said research is based on voluntary
mergers to create synergy, as against desperation. Thus, when the reasons for
mergers are confined to the promoter’s desperation, the future outcome is obviously
even bleaker.

Two broad critiques of the merger policy in the current financial sector of Nepal can
be made. One, during the process of merger, the staff feels the most insecure,
especially those who come from the merging entity (entity being merged into the
main entity), losing their current CEO to the main entity’s head. The new CEO often
does not know how to reach out to them and proper internal communication has
always been a neglected activity. The insecurity among the staff of the merging entity
can lead to unproductiveness, group-ism, internal disputes or a high attrition rate.

Two, CEOs of the merged entity have their own sets of problems/limitations. Since,
mergers are a relatively new activity, there are very few consultants, coaches and
advisors in the market experienced enough to comprehend the anxiety and problems
of the CEO during and after such merger processes. Further, even when such
consultants are available, hiring is always an additional cost burden, and demanding
such consultancy may even mean underselling the CEO’s capabilities to the board.
Unfortunately, CEOs of BFIs have always been largely portrayed as all-rounders and
experts and are often in denial about needing expert advice. Whenever mergers take
place, the role of independent consultants is crucial and a. planned and strategized
communication with the staff, assessment of their anxiety before the merger, and
grievance redressal post-merger are imperative activities.

The present merger processes in Nepal have not looked into these aspects seriously,
and thus, mergers have been reduced to merely physical integration. The NRB is
disinterested in analyzing these issues, and its focus is always corrective rather than
preventive. For promoters, a solution to the problem of cash outflow is the priority
instead of understanding the underlying issues. Hence, we now find ourselves in the
midst of a number of unorganized and unplanned mergers.

However, it is never too late and banks need to keep in mind very simple steps to
ensure a more holistically integrated merger. One, a proper internal communication
before, during and after the merger is needed – integrate the vision of different
individuals with that of the organization. Two, banks must assess, understand and
plan with the human resources (HR) team - they are the backbone of an organization
that address staff insecurity. Three, the HR department post integration should be
strengthened further. Four, the CEOs must stop being reluctant to seek expert advice,
after all, it is better to say ‘I don’t know’ and learn than pretend and say ‘I know’ and
be sorry. Five, promoters should focus on their employees’ integration rather than
money to create future wealth for themselves. And finally, regulators should
remember numbers don’t matter; it is always easier to handle small bugs than to
handle bigger monsters later. The key is not to force, but rather motivate and
incentivize organizations to integrate in an all-encompassing manner.”
2.2.3 Review of Thesis
Merger and Acquisition Transactions are increasing in Nepal over the few years.
Especially with the Central Bank of Nepal’s mandate for the merger of Bank and
Financial Institutions, numbers of Mergers happening in Nepal is increasing day by
day. For class ‘B’ and ‘C’ financial institutions, upgrading and expansion in the
area of the operation is one of the most lucrative results of a merger.

However, it is no secret that central bank has been directing financial institutions
being promoted by the same group to merge. The merger between Global Bank and
IME, and the merger between Bank of Asia Nepal and NIC Bank was pushed by
NRB due to common promoters. Here are the some of the past research studies’
review conducted on the topic merger & acquisition.

Hultman, & Sandstrom (2013)has conducted a study on “Mergers inside a

corporation’s structure-A case study of the motives behind merging subsidiaries and
the effects it brings”, and explained that mergers and acquisitions (M & A) are
something that can be read about almost every day and are common in today’s
business world. Since the 1980’s, there has been an upward trend for M & As
worldwide and companies have been using M & As to gain advantages. After an
acquisition is accomplished, whether new or old, companies are faced with a decision
to merge their acquired companies to form one legal entity or keep their subsidiaries
independent. There are both advantages and disadvantages of creating one legal
entity such as corporate culture issues, organizational change and the creation of
synergies.

This thesis has explored mergers between subsidiaries and the motives a specific
corporation had for merging their subsidiaries. The thesis has also explored the
financial and organizational effects these mergers have had. Finally, the thesis
compares previous merger literature to see if it also applies to merger done between
subsidiaries within the same corporate structure.

This thesis has explored mergers through a case study at a large Swedish corporation
which is currently undergoing this process. Structured interviews have been used to
form the empirical chapter. In the researched mergers three main motives have been
found for merging corporation’s subsidiaries. There are reducing costs, increasing
the financial reporting quality and finally increasing the internal control. There have
been both positive and negative financial and organizational effects due to these
mergers. There has been evidence that previous research correlates to some extent,
mainly in the financial effects and the effects on the employees due to the
organizational changes.

Prompitak, D. (2014), has conducted a study on “The impact of bank mergers and
acquisitions on bank behavior”, on her thesis examines the impact of bank M & As on
lending behavior by CBs. It uses the data set of large European CBs from 1997 to
2005. Empirical models are formulated to explain the effects of mergers on bank loan
pricing behavior, interest margin setting, credit availability and lending objectives.
The analysis provides evidence that mergers have statistically significant influence
on reduced lending rates, interest margins and loan supply. Inddition, margins and
loan supply. In addition, lending objectives for merged and non-merging banks are
different, in that merge-involved banks tend to emphasis maximizing their utility,
while non-merging banks focus on remaining safe lending .

These results suggest that merged banks can obtain efficiency gains through mergers
and can pass these benefits to their customers in the form of lower lending rates and
interest margins. In addition, diversification gains could arise from consolidations.
This is because merged banks focus more on other business activities than traditional
intermediary activities. As non-interest income increases in relation to interest
income, banks can diversify their business activities and can reduce their non-interest
costs. As a result, they can be exposed to lower risk and therefore be less risk averse
than non-merging banks.

Turchynska, K. (2014), has conducted a study on “Bank mergers and acquisitions in

Ukraine: efficiency effects and implications”,tried to find whether bank mergers and
acquisitions in Ukraine affect efficiency of banks, which were engaged into
consolidation. It used DEA technique to estimate the efficiency of Ukrainian banks
and truncated regression analysis to evaluate dependence between technical efficiency
scores of the bank and different factors such as size, specialization, ownership of the
bank, riskiness of its assets and involvement into the merger.

From the analysis of time pattern of efficiency scores of banks that took part in the
consolidation conclude that if the target is small, the efficiency of the bidder will not
be affected after the merger. This conclusion is not confirmed by results of the
estimation of truncated regression model. It find the fact that the bank took part in the
consolidation negatively affect efficiency of the bank. The main reason for this is
distortions that are brought to the bank's functioning by the fact of the merger.

It also concludes that increase in the size of the bank positively affects its efficiency,
thus, merger indirectly can affect efficiency through increase in the size. In our case
due to small size of majority of targets this effect can be over weighted by the
distortion effect.

Specialization of the bank positively affects its efficiency. So if, as a result of the
merger, bank becomes more specialized in one or some particular types of activity;
this also will positively affect its efficiency and if bank operations become more
diversified its efficiency may decrease. This can treat as indirect effect of merger.

Foreign ownership positively affects efficiency of the banks. If as a result of the

merger domestic bank becomes a foreign owned it supposed to become more
efficient in the future. Since there is a tendency for Ukrainian banks to be
consolidated with foreign ones, it can expect increase in the efficiency of banks,
which will be engaged in this process, and of banking system as a whole.

Since it find negative efficiency effect from the merger, conclude that immediate
change in efficiency is not the main aim of the mergers in Ukraine, while a probable
aim can be an increase in geographical dispersion and influence in the regions by
large banks (which can result in the increasing efficiency in the future).

As noted in the thesis there is a problem of a small sample of merged banks. From
discussion about the dependence of the size of the target and the impact of the
merger on the efficiency level, it can conclude that if the target's size is comparable to
the size of the buyer, efficiency of the buyer will increase after the merger in case
when prior efficiency of the target was higher than efficiency of the bidder and vice
versa. Unfortunately, this expectation cannot be checked empirically with the
available data. Taking this into account it would consider research based on the
larger data sample as a possible expansion of the present research. It would be
interesting to test empirically the hypothesis proposed in this paper about dependence
of technical efficiency of the bank after the merger and the size of its merger
partners.

Jayadev, M. & Sarma, R.S. (2015), has conducted a study on “Mergers in Indian
Banking: An Analysis”, on their thesis analyzes some critical issues of consolidation
in Indian banking with particular emphasis on the views of two important stake-
holders viz. shareholders and managers. First it reviewed the trends in consolidation
in global and Indian banking. Then to ascertain the shareholders’ views conduct an
event study analysis of bank stock returns which reveals that in the case of forced
mergers, neither the bidder not the target banks’ shareholders have benefited. But in
the case of voluntary mergers, the bidder banks’ shareholders have gained more than
those of the target banks. In spite of absence of any gains to shareholders of bidder
banks, a survey of bank managers strongly favors mergers and identifies the critical
issues in a successful merger as the valuation of loan portfolio, integration of IT
platforms, and issues of human resource management. Finally we support the view of
the need for large banks by arguing that imminent challenges to banks such as those
posed by full convertibility, Base-II environment, financial inclusion, and need for
large investment banks are the primary factors driving further consolidation in the
banking sector in India and other Asian economies.

Khem R.K. (2016), has conducted a research on “Impact of merger & acquisition in
Nepalese Financial sector for Bank Survival”. The objectives of the study are to
overview the general knowledge of the merger & acquisition, to study the impact of
merger acquisition in the Nepalese banking and financial institutions when Nepal
Rastra Bank introduce a forceful merger policy, to provide an overview of the most
important factor that contribute for survival of the bank, to determine if merger &
acquisition can provide an engine for economic growth and sustainable development
and to examine if the practice of merger & acquisition improve the banking industry
profitability. The research provides the significance influence on the working
department of employees. It provides results about the consumers awareness and
unawareness of the merger transition in Nepali BFIs. The research has obtained the
results by comparing the pre and post merger financial performance of two sample
banks.

2.3 Review of NRB Merger Bylaws 2068

The growing number of financial institutions in a market size like Nepal is
unsustainable for the overall financial sector, thus mergers of banks and financial
institutions have been referred to as the best measure for long-term financial stability.

Little after a year Nepal Rastra Bank (NRB) announced its merger guidelines to
encourage mergers, the Nepali financial system is witnessing numerous mergers as
consolidation has become the best weapon to fight for survival in the overcrowded
market. The summary of the review is presented below:

As per the Merger Regulation 2011, banks and financial institutions seeking merger
first have to get an approval from shareholders through their annual general meeting.
In case of no prior approval was made from AGM, it could conduct emergency AGM
and get approval for merger. It will be cost efficiency for all kinds of BFIs to have a
decision from regular AGM for merger of it with any sound financial conditioned
BFIs and provide authority for searching of merging BFIs and carry out further
process to board of directors. Upon completion of searching merging BFIs, the
Memorandum of Understanding (MoU) should be duly signed by all the BFIs agreed
for merger process. The MoU should contain, the level of future merged bank or
financial institution, authorized, issued & paid up capital, proposed merger committee,
management committee for merged bank or financial institution, future CEO, number
of staffs, branches to be reduced or added etc.

In the 2nd phase of merger the MoU agreed should apply for Letter of Intent (LoI)
from NRB. They then have to submit a letter of intent at the central bank
incorporating details on capital adequacy, net worth, loan loss provisioning, liquidity,
and market share and value, among others. Similarly, it should attaché copy of
board minute decided for merging, time period for merging copy of MoU,
financial reports, letter of book closure for trading of stock from NEPSE, future plans
& strategy etc.

In the 3rd phase of merger after LoI from NRB, parties to the merger also have to
sign a legally binding comprehensive agreement on share distribution, ownership
structure, and workforce, asset and liabilities management, among others, which
has to be endorsed by shareholders through special general meeting. The Due
Diligence Audit (DDA) report as prescribed by NRB directives should be submitted
by auditor with clear mentioning about the capital adequacy, networth, loan
classification, loan loss provision and its adequacy, liquidity condition, human
resource management, information technology, market share, ownership structure,
market price etc along with suggestions and recommendations. The merging BFIs
have to submit application for final approval of merger to NRB with enclosement of
DDA report, financial reports, agreement papers for merger, copy of decision for
management of human resource etc in this stage. The NRB gives its decision on the
application submitted for merger within 45 days after analysis of the DDA and other
documents.

The central bank then gives a final approval based on these documents and new
merged bank or financial institution come into operation. This is not the end but
only the beginning. It is the real phase of merger. Former steps are just only planning
phase of merger, it is the implementation period of all the paper works made on the
process of merger. This is the most crucial, complex and turning point. BFIs have to
face different problems, complaints, suggestions and recommendations from
stakeholders which should be managed properly. The employees working in
established culture has to work in new work culture adjusting with new management,
work environment. The process of merger onwards this step are the challenging
process. In the words of Sermen & Heart (2006), “Merger is neither science nor an
art, it is the process. It is the management strategic process where the later on phases
are more challenging, complex and complicated than initial phases.”

2.4 Research Gap

Research gap is the deviation of the researches. During literature review, it found
very few thesis prepared on the topic merger practice by BFIs of Nepal. In order to
find out the pros and cons of present ongoing merger of BFIs and its impact on
return on shareholders, bank staffs and economy of the country, researcher selected
this topic for its research work.

Due to the following research gap in the previous researches, the researcher has
attempted to perform this research work.

 Researcher has not found any fresh research conducted on merger of BFIs of
Nepal.

 The rumors of pros & cons of BFIs merger in Nepal without any true and facts
as an evidence through case study.
 CHAPTER-III
RESEARCH METHODOLOGY

3.1 Introduction to Research Methodology

Research is a systematic method of finding right solution for the problem whereas
research methodology refers to the various sequential steps to adopt by a researcher in
studying a problem with certain objectives in view. Research methodology is the
process of arriving at the solution of the problem through planned and systematic
dealing with the collection, analysis and interpretation of facts and figures. In other
words research methodology refers to the various methods of practices applied by the
researcher in the entire aspect of the study. It is the plan, structure and strategy of
investigations conceived to answer the research question or test the research
hypothesis. Research design is used to control variance. It includes types of research
design, research questions and hypothesis sample, data collection activities, technique
of analysis etc.

3.2 Research Design

Research design is considered as a "blueprint" for research, dealing with at least
four problems: which questions to study, which data are relevant, what data to
collect, and how to analyze the results. The best design depends on the research
question as well as the orientation of the researcher. Every design has its positive and
negative sides.

Research design can be divided into ‘quantitative research designs’ and ‘qualitative
research designs,’ respectively. In quantitative designs, the design of the study is
fixed before the main stage of data collection takes place. The qualitative designs
allow for more freedom during the data collection process. One reason for using a
flexible research design can be that the variable of interest is not quantitatively
measurable, such as culture. Similarly, theory might not be available before one
starts the research.

The study is mainly based on two types of research designs i.e. descriptive and
analytical. Descriptive research design describes the general procedure of merger and
its impact on Nepalese financial sector. The analytical research design makes analysis
of the gathered facts and information and makes a critical evaluation of it.
3.3 Population and Sample
In general term “population,” means people in our town, region, state or country and
their respective characteristics such as gender, age, marital status, ethnic membership,
religion and so forth. In statistics the term “population” takes on a slightly different
meaning. The “population” in statistics includes all members of a defined group that
we are studying or collecting information on for data driven decisions. In this
research study, the total number of banks and financial institutions licensed by NRB
are the population for the study i.e 28 commercial banks, 32 development banks, 54
finance companies.

A part of the population is called a sample. It is a proportion of the population, a

slice of it, a part of it and all its characteristics. A sample is a scientifically drawn
group that actually possesses the same characteristics as the population – if it is drawn
randomly. For the research study, it has been randomly selected a sample BFIs that
has under operation after merger. Randomly drawn samples have two characteristics:

 Every BFIs has an equal opportunity to be selected for the sample

 Selection of a BFIs is independent of the selection of another BFIs
Many BFIs has been through the merger process whereas there are some of BFIs
under pipeline of merger. The list of BFIs which have already completed the merger
process and LoI received for merger by NRB are listed in table below: For the
comparative study of before and after merger for BFIs were selected that includes all
three class BFIs as indicated by bold letters are listed in 1st chapter.

3.4 Sources of Data

The data for the study have been collected through the primary sources and secondary
sources. It makes the study more realistic and meaningful because of the use of
historical data and primary data. The secondary data are the facts & figures published
in different journals, articles, bulletins, and reports etc that are authentic of any
organization or person. For the study the secondary data are collected from annual
reports of the selected samples and other websites.

The primary data are the first hand data collected by researcher especially for the
research study. These data are not disclosed before this study. It has been collected
through the observation, questionnaire, interview and telephone conversation to
concerned people and organizations to the study.
3.5 Data Collection and Processing Techniques
The study has used both primary and secondary data. The data collection technique
and process for primary and secondary data are applied differently.

3.5.1 Primary Data Collection Method

The primary data has been collected by the effort of the researcher through application
of multiple methods of primary data collection. Even though it used several techniques
like interview, telephone conversion, informal talks, focus is given for questionnaire
method. For this, a set of questionnaires is prepared. The questionnaire are filled up
by respondents and the collected data are tabulated systematically and related to the
research problem are presented with analysis in the next chapter. The format of the
questionnaire is given in annex section as a reference.

3.6 Data Analysis Tools

Several mathematical, statistical tools have been applied for the analysis of the data
collected and find out the solution for the research problem. Some of the data analysis
tools used in this study are: Ratios, Percentage, Average etc. Besides these, several
diagrams & charts have been used for the systematic and fine presentation of the
collected data so that the facts & figures merger & its impact can be grasped by the
readers in an early first view.Various financial and statistical tools are used to
analyze the data ratio analysis, arithmetic mean, standard deviation, hypothesis test,
etc were used in the study. A brief explanations of statistical and financial tools
employed in this study is given below.

3.6.1 Chi-square Test (  2)

Chi-square is a statistical test commonly used to compare observed data with data we
would expect to obtain according to a specific hypothesis. For example, if, according
to Mendel's laws, you expected 10 of 20 offspring from a cross to be male and the
actual observed number was 8 males, then you might want to know about the
"goodness to fit" between the observed and expected. Were the deviations
(differences between observed and expected) the result of chance, or were they due to
other factors. How much deviation can occur before you, the investigator, must
conclude that something other than chance is at work, causing the observed to differ
from the expected? The chi-square test is always testing what scientists call the null
hypothesis, which states that there is no significant difference between the expected
and observed result.
The formula for calculating chi-square (  2) is:
 2=∑ ( 0−E )2 E
That is, chi-square is the sum of the squared difference between observed (O) and the
expected (E) data (or the deviation, d), divided by the expected data in all possible
categories.

Data used in a chi-square analysis has to satisfy the following conditions.

 Randomly drawn from the population,
 reported in raw counts of frequency,
 measured variables must be independent,
 observed frequencies cannot be too small, and
 Values of independent and dependent variables must be mutually
exclusive.

There are two types of chi-square test:

The Chi-square test for goodness of fit which compares the expected and observed
values to determine how well an experimenter's predictions fit the data.

 The Chi-square test for independence which compares two sets of

categories to determine whether the two groups are distributed differently
among the categories.

3.6.2 Average (Mean)

Simply, average is the quotient obtained from the sum of observations divided by the
no. of observations. It is the arithmetic mean. It gives the average of the total
observations given for the study. It can be calculated using following formula:

Average ( X ) =
∑ X́
n

3.6.3 Percentage
Percentage is a number or ratio expressed as a fraction of 100. It is the best method for
comparison when the population and sample size differs for two different figures. It
can be calculated by dividing the figure whose percentage to find out by the total
figure. It is denoted using the percentage sign “%”.