Mergers and Acquisitions Reshape Nepal's Financial Sector

Nepal Rastra Bank (NRB) has aggressively promoted mergers and acquisitions (M&A) among banks and financial institutions as a strategic move to strengthen the country’s financial system. The efforts, ongoing for the past five years, have led to a major reduction in the number of institutions, significant growth in capital bases, and improvement in financial resilience.

Incentives Provided to Promote Mergers

To encourage the M&A process, NRB introduced several temporary facilities in addition to the Merger and Acquisition Regulations, 2073:

• Priority sector lending deadlines were extended by one year for merged institutions.

• Cash Reserve Ratio (CRR) was relaxed by 0.5% for one year.

• Statutory Liquidity Ratio (SLR) was relaxed by 1% for one year.

• Deposit collection limits were increased by 5% per institution.

• Cooling-off period for directors and executives moving between institutions post-merger was waived.

• Interest rate spread flexibility of 1% was provided between deposit and loan rates.

• Loan-to-deposit ratio breaches during merger integration were given one year to regularize.

• Branch consolidation within a one-kilometer radius did not require NRB approval.

• Single group board candidacy was enforced for merged entities to avoid governance disputes.

• Provincial development banks merging were allowed to establish corporate offices anywhere in the province and liaison offices in provincial capitals and Kathmandu.

These measures reduced regulatory pressures temporarily and provided operational breathing space for merging institutions.

Impact of the M&A Policy

Reduction in Number of Institutions

Between Chaitra 2076 (March 2020) and Magh 2081 (February 2025):

• Total banks and financial institutions decreased by 56.

• The microfinance sector saw the highest number of institutions merged or closed.

Interpretation:
The consolidation created larger, more stable institutions, reducing market fragmentation and unhealthy competition.

Growth in Paid-up Capital

During the same period:

• Commercial banks' average paid-up capital increased from NPR 9.01 billion to NPR 19.25 billion.

• Development banks' average paid-up capital rose from NPR 1.38 billion to NPR 2.52 billion.

• Finance companies' average paid-up capital grew from NPR 590 million to NPR 900 million.

Interpretation:
Higher capital bases enhanced the ability of banks to absorb shocks, finance larger projects, and meet international financial standards.

Growth in Capital Fund

The overall capital fund — a critical measure of financial strength — more than doubled across Class ‘A’, ‘B’, and ‘C’ institutions.

Interpretation:
Institutions are now better positioned to withstand economic downturns and market volatility.

Broader Effects on the Financial System

The merger strategy achieved several critical objectives:

• Increased financial stability: Larger institutions have a stronger ability to absorb financial shocks.

• Improved operational efficiency: Cost savings through branch closures and administrative consolidation.

• Strengthened risk management: Bigger banks are able to invest more in risk management systems and compliance.

• Enhanced competitiveness: A healthier competitive environment emerged as weaker players exited the market.

Challenges Ahead

Despite the positive outcomes, certain risks remain:

• Post-merger integration: Integrating systems, staff, and operations continues to be challenging.

• Service gaps: Rural and semi-urban areas may face service gaps if branch networks are aggressively rationalized.

• Microfinance risk: Excessive consolidation in microfinance could hurt financial inclusion efforts.

• Governance risks: Larger institutions need stricter governance frameworks to avoid management concentration risks.

Nepal Rastra Bank’s merger-driven approach has successfully consolidated and strengthened the country’s financial sector.
The focus now shifts towards effective post-merger management, maintaining access to banking services in all regions, and ensuring that institutions continue to follow prudent governance practices.
Overall, the strategy has been effective, but sustaining the gains will require continued vigilance and regulatory oversight.