In Nepal, at present there are 31 commercial banks, 87 development banks, 80 financial institutions, 21 micro finance companies and many

more saving and cooperatives too. So, with the limited customer and resources, there is tough competition in the banking industry. There are more than required financial institutions prevailing into the financial market. The bankers themselves believe that they are facing difficulties in the flow of the capital base and limited to the geographical coverage concentrating to the Kathmandu only. Hence, in order to maintain the harmony in the financial market and to prevent any types of losses and crashes in the future, the number of financial institutions shall be reduced and the only option is merger and acquisitions. All the financial institutions have the objective of maximizing profit and achieve growth in the business. But with the limited and small market size, the operations of the financial institutions are facing problems in earning required profit and intense competitions. Some of them are not still enough to provide the strong base for their business too. Being independent and facing with large number of competitors for limited customers and market size, they are not able to gather a larger capital base which is required to achieve sustainable growth and compete in the market to grab the opportunities. According to agreement made with WTO, the global players for banking industry can now enter and do business into the Nepalese market. But in Nepal, though there are large numbers of financial institutions, they are relatively week to compete with the global players. So in order to compete with them the banks in Nepal should go for merger and develop a competitive advantage to compete in a market. As there is no favorable environment for banks to increase capital by issuing shares except few players due to more than required banks and financial institutions, they have no any option apart from going merger rather than action to be taken from the central bank. Along with more than required banks and financial institutions, the problems with the banking sector have also risen up, as a result losing the public confidence in the banks than before. The demand for the loans is also increasing day by day. There are number of financial institutions as a independent but doesnt have adequate enough capital to fulfill their needs. So in order to provide loan and fulfill the market needs, the number of financial institutions shall be reduced and go for a merger to create a larger capital base to fulfill the market demands. In past years many financial institutions invested into the real sector. And NRB fixed a ceiling on real

sector after the rise in the non performing loans of the many banks and financial institutions. And again the NRB regulated a provision for expanding the capital base in order to make the safety for the return of the peoples money. So the financial institution had to get merged in order to get with the NRB standards. As the market itself recognizes more than enough financial institution, the market has also led the number of financial institutions to decline via merger. The number of banks is facing the liquidity problems. No new big projects are there in the market due to political instability or any other factors as a result they are having problems in finding and sorting out the good investment. But only few get those good investors and others dont find a good investment platform. So, due to the outnumbered banks with respect to the limited market size their expenses are rising and revenue generating sources are declining. Therefore, the number of banks should be reduced via merger to gain and maximize the returns. The sources for income for the whole banking industry is shrinking while the cost of fund is increasing due to inflation and the necessity of expanding business, in addition, the yields of alternate investment portfolios including government securities are at historical low. So there is also a need of identifying new investment areas for banks to improve core banking. And this requires a larger capital base which can be achieved via the adoption of merger for gaining a competitive advantage and maintaining healthy banking activities.