Banks should pass on merger benefits to public
Global IME Bank Limited started its integrated operation on Friday after the successful merger with Janata Bank Limited. This biggest merger has propelled the Global IME Bank to the top among 27 commercial banks in terms of capital, deposit and loans. With this achievement of Global IME Bank, Nepal Rastra Bank (NRB) officials seem to be happy as they have been pushing for the merger of commercial banks for the past few years. While most of the commercial banks have already submitted their commitment to go for the amalgamation, none of them have made any significant progress in finding the right partner. But as things stand now, this integration has already put pressure on other commercial banks to follow suit. This merger is milestone for the country’s journey toward banking consolidation. While bigger players could face more competition for profitability, it could be a ‘survival’ challenge for others. There could be multiple benefits that the consolidation could bring not only for banks themselves, but also for the overall economy of the country.
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The consolidation will increase the capacity of the integrated entities to finance mega projects, ending the requirement for banks to go for consortium financing. This will also help to effectively mobilize domestic resources for the development of major infrastructure projects as the country is desperately seeking to pump in huge investment or capital to sustain the momentum of economic growth. Banks, their shareholders and employees all stand to benefit from the merger. The operational expenses that the merger could save for banks increase profit for institution, compensation for their employees, and dividend for shareholders. This will also make regulator’s job easier as it will have a fewer number of banks to monitor, supervise and regulate.
However, becoming bigger may not necessarily mean better always. With more banks actively pursuing for merger, there are concerns that a fewer number of players in the market could promote anti-competitive behaviors in the banking sector. With the growth in the size, the merged entity could also be less tempted toward financing small and micro enterprises (SMEs) which contribute significantly to the country’s economy. The NRB — the banking sector regulatory authority—should be cautious about such risks. Equally, the merger would be meaningless if its benefits are not passed on to both depositors and borrowers. While the return for the depositors should be reasonable to ensure that they are parking their saving in banks, the borrowing cost for businesses should go down. The reduction in the operational expenses that merger brings should be passed on to the depositors through reasonable returns and borrowers through cheaper borrowing costs. As banks, their executives and shareholders are currently benefitting disproportionately at the expense of borrowers and depositors, the merger should end this malaise persisting in the banking sector.
