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THESIS PROPOSAL ON IMPACT OF MERGER AND ACQUISITION IN NEPALESE FINANCIAL SECTOR FOR A BANK SURVIVAL

BY SHUSIL RANA MBA ID: 5014/2010 KINGS COLLEGE INTERNATIONAL AMERICAN UNIVERSITY LA, USA

SUBMITTED TO: RESEACRH COMMITTEE KINGS COLLEGE, KATHMANDU NEPAL INTERNATIONAL AMERICAN UNIVERCITY LA, USA

May 9, 2012

Title of the study:

"IMPACT OF MERGER AND ACQUISITION IN NEPALESE FINANCIAL SECTOR FOR A BANK SURVIVAL ".

INTRODUCTION:

Basically, here Merger means combine two or more than two companies on the behalf raise of their capital to survive in the industry. Commercial banks have an essential role in the economy. One of their main duties is to collect funds from excess fund sectors and lend to customers with insufficient funds. From these financial intermediary activities, they have an important role in determining the amount and distribution of credit in the economy. Since an increase in bank credit leads to increased investment and in turn to increased employment levels, changes in bank lending behaviour have a marked impact on the economic development of the country. Banks change their lending decisions in response to changes in the structure of the banking market. One of the issues arising in this context is bank mergers and acquisition (M&As). Since market structures can change as a result of mergers, bank mergers can have a significant impact on changes in bank lending behavior. Bank consolidation in the form of merger become one of the regulations initiated by the Nepal Rastra bank in order to improve banking systems capacity to provide financial intermediation between savers and borrowers and restore public confidence. As merger activities around the world have the same purpose, the most common purpose for merger is to increase efficiency and reduce costs.

STATEMENT OF PROBLEM:

At the time when the Nepalese banking sector is going through torment and really tough phase NRB has brought a new merger bylaw believing that it w ill as a panacea of the entire burning problem and stated it as the need of the hour. This bylaw has been brought into effect by NRB to improve and develop the weak and problematic financial sector. M o s t of the experts and analysts believe that the Nepales e financial s e c t o r a r e overcrowded with so many players for the small size market and if not acted on time these problems will worsen. Previously, NRB had adopted the liberal licensing policy as t h e c o n s e q u e n c e t h e r e w a s a t r e m e n d o u s s u r g e i n t h e n u m b e r o f B F I s a n d n o w t h e overcrowding is hurting the financial sector. Virtually, with its new merger bylaw NRB is t r y i n g t o c o r r e c t i t s p r e v i o u s d e c i s i o n o f a d o p t i n g l i b e r a l l i c e n s i n g p o l i c y . T h e overwhelming outgrowth and the rapid surge of BFIs has not only led to the malpractice of banking norms and unfair competition but also has created such situation where it is difficult for NRB itself to grab the situation by the scruff of the neck, manage it and control it. So, NRB has introduced Merger Bylaw

2068 in order to manage and control the existing BFIs effectively and efficiently. Considering these facts and the situation, the proposed thesis tries to evaluate the merger bylaw of NRB and will try to present and c o n c l u d e w h e t h e r t h e m e r g e r b y l a w w i l l a c t a s a b a s e t o c u r e a l l t h e p r o b l e m s surrounding the Nepalese financial sector.

Structure of literature review:


NRB has tried to cover all the three aspects of effective and prudential regulation of E f f e c t i v e L i c e n s i n g , R e g u l a t o r y N o r m s a n d E f f e c t i v e S u p e r v i s i o n w i t h i t s d yn a m i c directives and guidelines. The licensing policy deals with provisions regarding the paid- u p c a p i t a l f o r a l l t h e f o u r c l a s s e s o f B F I s , m i n i m u m i n v e s t m e n t r e q u i r e m e n t f r o m promoters, general public, foreign investors and employees, procedure and time period to s u b m i t a p p l i c a t i o n , f e e s a n d p a r t i a l d e p o s i t o f capital, registration provisions ,qualification of promoters, e x p a n s i o n o f w o r k i n g t e r r i t o r y a n d m i n i m u m c a p i t a l requirement. NRB had adopted the liberal licensing policy as the consequence there was a t r e m e n d o u s s u r g e i n t h e n u m b e r o f B F I s f r o m 2 0 0 4 t o 2 0 0 9 ; h o w e v e r , d u e t o t h e mushrooming of BFIs in small market and pressure from supra national organization like IMF, NRB now has adopted more tighter licensing policy. NRB has issued 21 directives f o r c o v e r i n g i t s p r u d e n t i a l r e g u l a t o r y n o r m s a n d t h e d i r e c t i v e s d e a l i n g w i t h v a r i o u s aspects like capital adequacy, loan classification and provisioning, single obligor limit ,a c c o u n t i n g p o l i c i e s a n d f i n a n c i a l s t a t e m e n t s f o r m a t , r i s k m a n a g e m e n t , c o r p o r a t e governance, supervisory compliance, investment policy, submission of statistical reports, sales of transfer of promoters share, consortium financing, credit information/black l i s t i n g , p r o v i s i o n o n C R R / S L R , b r a n c h e x p a n s i o n , i n t e r e s t r a t e , f i n a n c i a l r e s o u r c e s mobilization, deprive sector lending, KYC, SLF, etc. NRB regularly reviews the process by which BFIs assesses its capital, risk position, capital levels, and quality of capital as a part of its supervisory mechanism. It evaluates the degree to which a BFIs has in place a sound internal process to assess capital adequacy. NRBs supervision emphasizes on the quality of the BFIs risk management and internal controls. The process of regulatory supervision can involve any or combination of On -site examination or inspection, Off-site review, Discussion with management, Review of work done by external auditor, and p e r i o d i c r e p o r t i n g . D e s p i t e a l l t h e s e p r u d e n t i a l n o r m s , r e g u l a t i o n a n d s u p e r v i s i o n mechanism of NRB, the BFIs are facing the problems and are in verge of going out of the business. The adverse morale hazard has prevailed in Nepalese financial sector due to recent episodes of malpractices in a few notable financial institutions has dented the public's confidence in the banking system in general, making the problem worst and creating a more vicious circle. In response to these burning problems and in order to gain the confidence of the investors in financial sector and to sustain the financial market.

The bank merger phenomenon has been widely accepted as the way to achieve performance improvement, especially when merger activities focus on geography, economic of scale, and activity lines (DeLong, 2001; Houston et al., 2001). In addition ,many urgue that bank mergers could improve economies of scale and cost reduction when they share information, transaction system and monitoring costs (van Rooij, 1997). The economies of scale of merged banks could be achieved since they can reduce the average cost by expanding the volume of similar banking products. Therefore, when the economies of scale argument hold, then the greater the benefits received by the merged banks (Jensen and Ruback, 1983). Study on the effect of bank mergers on performance has been conducted in many countries with various findings. For example, Allen and Boobal-Batchelor (2005) studied the post-crisis bank mergers in Malyasia. The study found that the target banks tend to be less efficient than those acquiring banks. Furthermore, most efficiency gains was found due to a an improvement in managerial efficiency. In contrast, Kwan (2004) based on US banking consolidation policy in 1997 raised issue of whether mergers contributed to the efficiency gains. Findings from previous studies of bank mergers in Indonesia also show various results. For example, Samosir (2003) found that there were no performance differences between before and after the merger. In contrast, Soemonagoro (2006) found that a merged bank experienced a continuing performance improvement from 1999 to 2005. However, its loan-to deposit ratio was relatively low indicated that the bank failed to fulfill its function as an intermediary institution. Other study by Hadad et al. (2003) found that only privately-owned banks found as the most efficient banks. In addition, Putra (2003) revealed that on average the technical efficiency of 45 foreign exchange Indonesia banks were 71.26 percent and 74.37 percent on 2001 and 2002 respectively. This section reviews the studies related to the impact of bank mergers on performance of a bank and lending behaviour. Although there may be some other research examining the impact of bank mergers, the literature reviewed in this section is directly relevant to the main objective of this thesis, which is to analyse whether bank M&As can have some influence on the changes in the lending behavior that affect on banks performance of merged banks. In addition, this literature also provides sufficient knowledge of the way in which bank decide their lending and how bank consolidations affect the lending decisions of merged banks. The section includes two main parts. The first part discusses the conventional literature on lending behaviour, focusing on the factors which influence bank loan interest rates and bank interest margins. Then, the empirical evidence of the impact of bank mergers on lending behaviour is reviewed, including pricing behaviour and attitude toward risk.

Significance of the study:


An inclusive merger mechanism became one option for the Indonesian banking industry to response the Asian Financial crisis under its bank consolidation program. This study gives insight into the effectiveness of economic policy reforms in the Indonesian banking industry. This study examines the impacts of merger on commercial banks performance in Indonesia during 1997 to 2006. The period was characterized by financial deregulation, the Asian economic crisis, and bank restructuring programs. The traditional financial ratios and nonparametric Data Envelopment Analysis approach is employed to investigate any efficiency gains both in the pre and post merger periods, in order to detect whether bank mergers produce any efficiency gains as well as factors contributed to the performance. The evidence shows that merger created synergy as indicates by the statistically and significantly increasing the postmerger financial and productive efficiency performances.

Objective of study:
Some of the objectives of this study are:
To overview the general knowledge of the merger and acquisition. To overview merger and acquisition as a business strategy. And main objectives is to provide an overview of the most important factor that contribute for survival of the bank.

Scope and limitation:


Time constraints Budgetary constraints The participants comprised a small sample, which can be generalized across the sector

Research methodology:
I think that initially my dissertation will be descriptive in the first part with a general presentation of the M&A in banking sector, and then causal and exploratory. Case stud y of problematic BFIs in Nepalese financial sector namel y R a s t r ya B a n i j ya B a n k , N e p a l B a n g l a d e s h B a n k , N e p a l D e v e l o p m e n t B a n k , G u r k h a Development Bank, Samjhana Finance and Nepal Share Market. Case analysis of few successful mergers to improve the financial sector in the world.

Data Collection
To attain the objectives what researcher have proposed, researcher have planned to consider altogether nine banks and financial institutions .Among them, three will be three government owned commercial bank( i.e. Nepal bank ltd, Banijya bank ltd, Agricultural bank ltd), three private commercial bank (Nabil bank ltd, Nepal investment bank ltd and Prime commercial bank ltd ,and three national level development banks( i.e. Ace development bank ltd, International development bank ltd and Vibor development banks) , to know the awareness and perceptions about internet banking and mobile banking .for that, researcher will distribute the questionnaires to the customers ,banking professionals, businessmen, master graduates and academicians. Thus, researcher has planned to consider altogether 200 people. Delphi Technique as a source to collect primary data and various journals and publications will be used to access the secondary data. Further, Statistical Package for Social Sciences (SPSS) and Microsoft excel will be used to analyze the returned questionnaires using descriptive statistics. The objectives will be tested using simple regression method. Thus, responses to questions would be coded, tabulated and processed using the Statistical Package for Social Sciences (SPSS) software and will be analyzed using frequencies with mean, mode and median indicated.
Moreover, the processed data will be presented in tables, graphs, charts, etc. Findings will be deduced from these followed by logical conclusions which will form the basis for appropriate recommendations.

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