Exim Bank calls off planned merger with troubled Padma Bank

• EXIM Bank called off planned merger with Padma Bank 
• Decision disclosed today at DSE
• Scam-hit Padma Bank was set to merge even after Tk1,700cr govt bailout package
• The merger was the first voluntary merger between private banks in Bangladesh
• MoU was signed on 18 March at BB headquarters

   

Private commercial Exim Bank has decided to call off its planned merger with scam-hit Padma Bank, nearly nine months after it announced the decision to create a single entity. 

In a disclosure to the Dhaka Stock Exchange (DSE) yesterday, Exim Bank announced that its board of directors decided in a Monday meeting not to proceed with the amalgamation of Padma Bank PLC.

The Business Standard attempted to reach several officials at Exim Bank by phone to inquire about the cancellation of the merger but was unsuccessful. While the bank's Managing Director, Mohammad Firoz Hossain, answered the call, he declined to comment on the matter.

On 14 March this year, after failing to get back to health with the government's over Tk1,700 crore bailout package, the scam-hit Padma Bank opted to merge with Exim Bank in the country's first voluntary merger. The Exim Bank board then decided to create a single entity by acquiring Padma Bank.

Following that decision on 18 March, a Memorandum of Understanding (MoU) was signed between the two banks at the Bangladesh Bank headquarters to initiate the merger process.

At the time, Nazrul Islam Mazumder, then chairman of Exim Bank and the Association of Bankers Bangladesh (ABB), said that Padma Bank would operate under the name of Exim Bank after the merger, making the name obsolete. He also reassured that no employees of Padma Bank would lose their jobs due to the merger.

Padma Bank – initially launched as Farmers Bank in 2013 and later renamed as Padma Bank, has undergone significant challenges due to massive lending anomalies since its inception. In 2017, Chowdhury Nafeez Sarafat assumed the role of its chairman. However, widespread irregularities had plagued the bank since the beginning, necessitating government intervention in early 2018.

To rescue the bank, state-owned Sonali, Agrani, Janata, and Rupali banks and the Investment Corporation of Bangladesh (ICB) injected a capital infusion of Tk715 crore. In addition, state-owned banks invested nearly Tk1,000 crore in Padma Bank through subordinated bonds and fixed deposits.

Despite these efforts, the bank's capital erosion could not be mitigated due to its inability to recover non-performing loans.

The Bangladesh Bank had prepared a draft guideline on mergers, keeping the provision of incentivising strong banks interested in such mergers with weak banks.

The bank that merges with a weak bank will be offered various policy support, including regulatory relaxation regarding minimum capital requirement (MCR), provisioning, cash-reserve ratio (CRR), and statutory liquidity ratio (SLR) requirements, maintaining required liquidity coverage ratio, forex support, tax incentive, bond facilities etc, according to the draft guidelines.

Padma Bank's health

At the end of 2023, Padma Bank's outstanding loans amounted to Tk5,740 crore, of which Tk3,550 crore was defaulted, indicating a limited capacity for the bank to reimburse depositors. The default loan rate was nearly 47% as of June 2023.

Also, the bank recorded a capital shortfall of Tk607 crore at the end of September 2023. The total deposits of the bank stood at above Tk6,500 crore at the end of June 2023. Primary data shows that the liabilities of the bank were Tk5,000 crore higher than assets.

With the provided bailout package, the government holds a 65% stake in the bank. At present, state bank representatives are on the board of Padma Bank as investors. Nearly 950 employees are working at the bank.

Meanwhile, Chowdhury Nafeez Sarafat, who joined the bank as its chairman six years back soon after board reconstruction with the government's bailout package, resigned in January this year.

Nafeez Sarafat became the chairman of the bank as the institutional representative of 12 mutual funds invested in Padma Bank.

The bank's managing director, Tarek Reaz, also resigned from the bank in September last year but the Bangladesh Bank reinstated him.

Salehuddin Ahmed, a former governor of the central bank and now the interim government's finance adviser, told TBS at that time that struggling banks which could not be fixed for a long time should be merged. "I think it is a good initiative that Padma Bank and Exim Bank have decided to merge voluntarily."

He said it is important to prioritise the interests of depositors during the merger process, requiring coordination between the legal and technical aspects of both banks.

"While bank mergers have occurred previously in Bangladesh, steps must align with international policies. Immediate payment arrangements should be in place for small depositors," said Salehuddin.

Besides, there can be coordination with large depositors to convert their deposits into shares, he recommended at that time.

"Padma Bank has to play a greater role in collecting money from bad customers," the former central bank chief said.

He suggested that the central bank should give a concession for a lean period in keeping CRR and SLR if the liability is more than the assets of the weak bank. Besides, the central bank could offer refinancing options in certain cases and consider recapitalisation measures.

A troubled legacy

Nafeez Sarafat joined Padma Bank in January 2018 after its former chairman Muhiuddin Khan Alamgir resigned from the board for his alleged involvement in loan scams involving Tk500 crore.

Alamgir was given a smooth exit from the bank through resignation and public money was injected to compensate for the scam.

Sarafat was made the next chairman by the Bangladesh Bank although he was in the same board that was allegedly found involved in loan irregularities.

The 12 mutual funds which Sarafat was representing were formed from money taken from other private commercial banks. Those mutual funds could not generate returns for those investor banks due to bad investment in Padma Bank.

In July 2021, Md Ehsan Khasru, the then managing director of Padma Bank, submitted a merger or acquisition proposal to the finance ministry due to huge defaulted loans, an inability to return deposits, and large losses. But the merger never happened.

After proposing the merger, Padma Bank said in a press release in September 2021 that it had entered into an agreement with US-based investment bank DelMorgan and Company.

It said DelMorgan would act as the lead arranger of a $700 million investment, including $350 million in equity investments and the rest of $350 million as a credit facility. But the money did not come, according to bank insiders.

To secure funds from foreign sources, Padma Bank reportedly withheld information about accumulated losses exceeding Tk900 crore, and the central bank allegedly consented to establish a separate account without disclosing this information, as per media reports.

Also, the central bank eased regulations for Padma Bank, particularly concerning the maintenance of the CRR and SLR.

However, the bank could not raise the funds finally.

In February 2023, the Investment Corporation of Bangladesh (ICB) decided to withdraw investments from Padma Bank after not getting any return on the investment in five years. The state-owned corporation is now looking for strategic investors from home and abroad to sell its shares in the crisis-ridden lender.

Sarafat, neither could raise foreign funds nor recover the return from the investment that the bank made into mutual funds operated under his asset management company named Bangladesh RACE Asset Management, according to bank documents obtained by TBS.

Finally, he took a safe exit from the bank by resigning similar to what the former chairman of Farmers Bank Muhiuddin Khan Alamgir did after failing to return the bank to health.

The bank also removed all balance sheets from its website.

According to the Bank Company Act, it is mandatory for a bank to publish an annual report to disclose its financial health to depositors. However, the bank has no report available on the website.

TBS contacted the bank's Public Relations Department for an annual report but it could not provide the document saying they "don't have any report."

Regarding the matter, Executive Director of the Bangladesh Bank Md Mezbaul Haque said publishing an annual report on a bank's website was not mandatory.

"Maybe the bank was given exemption from publishing annual reports but for which year that exemption was given, that I am not sure," he said.