Banking Khabar/Foreign investors in Nepal’s banking sector have started rapidly exiting by selling their shares. Recently, Pakistan’s Habib Bank and India’s Muthoot Finance Limited have put up their shares in Nepali banks for sale and are preparing to exit. This has shown indications of affecting not only the structure of the banking sector but also the strategies between investors and promoter shareholders.
Habib Bank has reached the final stage of selling its 28,012,447 shares in Himalayan Bank to National Life Insurance. Although the bank had attempted to sell its shares in the past as well, it could not succeed due to legal and policy reasons.
In Jestha, Himalayan Reinsurance Company had applied to purchase the shares. However, according to the Banks and Financial Institutions Act, 2016, and the directives of Nepal Rastra Bank, promoter shareholders had to be given first priority, due to which Reinsurance could not purchase the shares. After that, National Life applied at the last moment to buy Habib’s shares, and Habib accepted the proposal.
Habib Bank had set the minimum selling price of the shares at NPR 112.80 per share, whereas National Life proposed to buy at NPR 118.88 per share. Since this was about NPR 6 higher than the minimum price, the share sale process moved forward.
Habib Bank had previously attempted to sell shares twice. In 2019, it had tried to sell shares to the Commonwealth Development Corporation of the UK, but due to the opposition of the then chairman of the bank, the process was stopped.
Again, in Mangsir 2080, an agreement was made with Himalayan Reinsurance to sell shares, but as approval was not received from Nepal Rastra Bank, the process could not be completed. For Habib Bank, this third attempt has reached the final stage.
In Nabil Bank, Indian Finance is preparing to exit.
Similarly, in Nabil Bank, Indian financial institution Muthoot Finance Limited is also preparing to exit by selling its 1,198,531 promoter shares. At present, only promoter shareholders are allowed to apply for the purchase of these shares. A period of 35 days has been given for application. If no applications are received within the specified time, the share sale will be opened to other individuals or institutions.
IFIC ownership not transferred despite share sale agreement
Nepal Bangladesh (NB) Bank, established in 1994 (2051 BS) with joint investment from Bangladesh’s IFIC Bank, was merged into Nabil Bank in 2021 (2078 BS).
At the time of establishment, out of the NPR 300 million capital, IFIC’s share was 50 percent, and the remaining 50 percent belonged to local partners and the general public. In 2006 (2063 BS), when the bank became problematic, Nepal Rastra Bank took control of its management. However, until then, the Bangladeshi investors had not withdrawn their cash investment from Nepal. Instead, they expanded their capital through bonus shares.
To stabilize NB Bank, Nepal Rastra Bank kept it under direct control for three years and formed a new board of directors in 2009 (2066 BS). During this time, in Ashoj 2064, Nepal Bangladesh Finance and Leasing Company was merged into NB Bank, and in Magh 2067, Nepal Sri Lanka Merchant Bank was also merged into NB Bank. After these mergers, IFIC’s share decreased somewhat, but in 2014 (2071 BS), by purchasing promoter shares from local partners, IFIC again raised its share to 42 percent.
However, before being merged into Nabil Bank, IFIC’s ownership had fallen to 40.09 percent. Due to the unexpected capital increase imposed by Nepal Rastra Bank, the impact of the coronavirus pandemic, and the government’s ‘merger’ policy, IFIC was dissatisfied. In addition, due to linguistic challenges and complexities seen in management, problems were encountered in business expansion.
For this reason, IFIC concluded that it could not maintain dominance in Nepal with a large shareholding and decided to exit by selling its shares. Although IFIC had made an agreement to sell its shares to Nepal’s Chaudhary Group, Nepal Rastra Bank has not given permission to proceed with the share transfer process.
Why are foreign companies exiting Nepali banks?
There are many reasons behind foreign companies exiting Nepal’s banks. These are mentioned below:
Economic recession and market instability
Currently, in Nepal, the banking sector is facing a situation of declining interest rates, reduced investment and loan demand, and somewhat slower economic growth. In such a situation, foreign companies adopt the strategy of selling shares to secure immediate benefits from their investments.
Example: Habib Bank’s decision to sell shares of Himalayan Bank was made from the perspective of recovering investment during the recession.
Legal and policy complexities
The rule that priority must be given to promoter groups when selling promoter shares limits the options of foreign investors. The requirement of obtaining approval from Nepal Rastra Bank increases time and effort. Due to this, foreign companies, unable to sell shares in a simple way, may decide to exit.
Ensuring financial benefit
The rise in share prices provides opportunities for immediate profit. If the market is not stable, foreign companies prefer to recover their investment rather than take risks.
Strategic focus and reinvestment
Foreign companies may have changed their long-term strategic focus in Nepal’s banking sector. To invest their capital in other markets or sectors, they may decide to exit.
Competition with promoter shareholders
As seen in the example of Habib Bank, when local promoter shareholders attempt to increase their stake, the opportunities of foreign companies become limited. Due to such competition, foreign investors may choose the simpler way of exiting.
Regular reporting and administrative burden
Foreign investors in Nepal’s banks are required to submit regular financial reports, obtain approval from Nepal Rastra Bank, and comply with other regulations. This increases the administrative burden, which adds motivation to exit.
The main reasons for foreign companies exiting Nepali banks are market recession, legal complexities, ensuring profits, strategic reinvestment, and competition. This is not only a case of share sales but also an indication of change in the role of investors and promoter shareholders in Nepal’s banking market.
Foreign investment declining in Nepal’s banking sector
In recent years, interest of foreign investors in Nepal’s banking sector has been gradually declining. According to the statistics of Nepal Rastra Bank, currently only a few commercial banks have foreign investment, while some have already sold their shares and moved ahead in the process of exit.
In Nepal SBI Bank, India’s State Bank of India has 55 percent ownership, while Everest Bank has joint investment from Punjab National Bank (PNB), India, and NCC Bank, Bangladesh. Similarly, Standard Chartered Bank (UK/Hong Kong) is directly operating in Nepal.
Likewise, Bangladesh’s IFIC Bank had made a large investment in Nepal Bangladesh Bank, but although an agreement was reached to sell that ownership to Chaudhary Group, the transfer process has still been stalled. Similarly, investors such as Pakistan’s Habib Bank Limited and India’s Bank of India have already withdrawn their investment from Nepal.
