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 are 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 trend of mergers among banks and other financial institutions reflects myopic approach that limits mergers to just physical integration, ignoring the cultural aspect.
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.
The author is co-founder of beed - a Nepal-based management consulting and financial advisory firm