For quite some time now, and more so, after the Global Financial Crisis in 2008, consolidation has become a much discussed and rather important topic for not only in the developed Western World but also in the fast growing emerging economies. In this context, South Asia also needs a greater attention and quicker implementation.

 

If we look back, the Asian crisis in the late nineties virtually compelled the tiger economies to pursue financial consolidation, and the result was quite satisfactory. The Malaysian economy is a clear case in point.

 

If we look at India, it can be seen that mergers between private banks have happened at regular intervals, while the success in the public sector banks has been less noteworthy. Although the Finance Ministry panel recommended that smaller public sector banks should get prepared for mergers with bigger players, it remained a debate amongst the bankers and specialists, delaying the whole process. Perhaps it could be a trial attempt to prepare public opinion about the need and consequent benefits of consolidation.

 

India is a vast economy and has twenty seven Public Sector Banks (PSB). Way back in 1991, one can recollect that the Narsingham Committee talked about creating four global-sized banks and a few domestic banks to create a solid foundation and propagate the economy. Perhaps most of the people would agree that there is a need to build scale, consolidate capacity, avoid unnecessary competition and preserve scarce capital - both Government and - private, for development of fewer banks and in turn, strengthen the economic base. Not only is this applicable to the Indian economy but also it could equally be appropriate for other emerging and developing economies, at various stages where domestic capital formation has been inadequate to support the growing mature GDP.

 

Now let us turn to Nepal. This subject has been receiving attention and creating healthy debate for quite some time. Of late, the central bank has come out with a directive guiding and encouraging the commercial banks and financial institutions with regard to mergers. While this is a very good step towards consolidation, one needs to dig deep as to how to go about it. When would be the right time to do so? How to identify the partners? Before that, a bigger question comes up for due consideration: will the local mergers truly do good to the financial market?

 

Only hastening the process without due and detailed understanding of the after-effects and the probable results, consolidation in the financial market would do more harm than yielding benefits as desired. Given the nature of Nepali financial market and the constituent players, it would be critically important to ensure that governance at the participants’ level and at the regulators end work more adequately than it is currently being observed. Though it must be said that the level of governance has improved over the past decade, one must admit that it still remains well below the standard that is required to consolidate the foundation of the financial market. This is an iterative process and would require much stricter compliance, if we compare with other developing markets where consolidation is happening at a much faster pace.

 

Another point that comes to mind is that the government and the regulators would require to critically look at foreign expertise to help support a meaningful consolidation in the nepali financial market. The recent devastating earthquake has also inflicted a deep injury not only in the hearts of the people but also in the financial market; the level of NPA’s is likely to move up sharply stemming mainly from the real estate segment and also from other related businesses. So the resuscitation would consume a good amount of capital and time, delaying the process of consolidation required for the next phase of growth.

 

However, I remain hopeful that the concerted efforts currently in train in Nepal would accelerate the recovery process and see the light at the end of the tunnel in the not too distant future.