NRB to seek tax incentive for merging banks

KATHMANDU, JUL 04 -

Nepal Rastra Bank (NRB) is preparing to ask the government to provide tax incentives to banks and financial institutions (BFIs) going for a merger. Both the central bank and the government have been encouraging consolidation for a sound financial system.

BFIs have been demanding that the corporate income tax be slashed for those opting to combine. They want the tax which currently stands at 30 percent to be reduced to 20 percent.

 “We will shortly request the Finance Ministry to provide tax incentives to BFIs opting to consolidate,” said a senior NRB official. “More incentives will further encourage BFIs to go for a merger when the country is in urgent need for them to come together.”

Although the government is yet to provide any tangible benefit to BFIs going for a merger, the central bank announced a number of inducements when issuing the merger bylaw.

Under the merger bylaw, the central bank has relaxed several regulatory provisions. It has relaxed the provision on promoters’ holdings in the merged entity, and a period of five years has been given to promoters to off load their shares if they cross the limit set by NRB. As per the existing law, a single group cannot hold more than 15 percent of the stake in a merged institution.

Promoter shareholders, who have a share of more than 1 percent in BFIs and have taken loans by putting up their shares as collateral, have been given three years’ time to decrease the amount of their loans to 50 percent of the value of their shares. According to the bylaw, a merged entity will get two years’ time to decrease its investment in shares and debentures of other corporate bodies to 10 percent.

In addition, the central bank will also give priority to merged entities for upgradation if they have fulfilled procedural and infrastructural prerequisites. Merged institutions will get 30 days’ time instead of the current five days to use the standard liquidity facility.

The government for the first time offered incentives to BFIs and insurance companies going for a merger through the budget announcement for the fiscal year 2009-10.

Bankers said that the tax benefit would encourage reluctant BFIs to join forces. “Commercial banks have hardly gone for mergers, and tax benefits will encourage them to do so,” said Upendra Poudel, chief executive officer of NMB Bank which has signed a memorandum of understanding (MoU) with Clean Energy Development Bank to combine.

Most of the mergers, completed or planned, have been between development banks and finance companies. Only a few commercial banks have combined. Two pairs of commercial banks, NIC Bank and the Bank of Asia and Machhapuchchhre Bank and Standard Finance, have chosen to merge.

The number of BFIs in the financial system will come down by 18 to 200 after all the planned mergers are completed. “That is still too many BFIs, and we want to reduce the number significantly and have a few strong financial institutions providing financial services to the people,” said an NRB official.

The International Monetary Fund has long been asking NRB to stop issuing new licenses and even upgrading because it will strain the supervisory capacity of the central bank and pose a risk to the financial system.

Source: http://www.ekantipur.com/2012/07/04/business/nrb-to-seek-tax-incentive-for-merging-banks/356582/