At least 10 banks to be forced to merge by next January

Illustration: TBS

The central bank plans to go for forced merger of at least 10 banks by January next year as part of its road map to reduce default loans and ensure corporate governance in the banking sector.

Bangladesh Bank Governor Abdur Rouf Talukder shared the plan with leaders of Bangladesh Association of Banks (BAB) at a meeting held on Monday at Bangladesh Bank headquarters. Directors of seven commercial banks including state-owned and private banks attended the meeting.

According to a meeting source, the governor instructed bank owners to take preparation for the merger and choose which bank they prefer to merge with. 

The governor assured them that directors will not be affected by mergers as their financial losses will be compensated. 

Besides weak banks, even strong banks can be merged to form a large private commercial bank to reduce the number of banks, the governor suggested to bank directors in the meeting. 

Citing an example, the governor said City and Eastern, two large strong private commercial banks can be merged to form a new large bank, said the source who attended the meeting. 

The concerns surrounding forced merger of banks, which began in 2023, have been dispelled as any such move will only aim to make the banks stronger, Bangladesh Association of Banks (BAB) Chairman Nazrul Islam Mazumder told reporters after the meeting. 

"The governor answered our queries well. We understand that no one will be harmed by this. Weak banks will become stronger and good banks will become even better," he said.

"Considering various examples of banks merging in different countries, we will accept the move in national interest," he added.

After the meeting, Executive Director and Spokesperson of the Bangladesh Bank Mezbaul Haque said, "We decided to merge banks for the wellbeing of the banking sector. After reviewing the overall issue, we will develop a policy."

He said they will be able to identify weak banks by March this year. "After that, a decision will be taken as to which banks need to be merged. Then the process will start in the light of the policies made considering the overall issues."

The central bank spokesperson further said, "We have before us examples from different countries of the world…in most cases, banks were merged through the owners' own initiative. In some cases, the regulatory body decided. We also want the owners to decide. We will decide if the need arises."

Monzurur Rahman, chairman of Pubali Bank, said the central bank governor at the meeting assured them that the merger will be guided according to international practices.

He said, "The weak bank can never be with a strong one. For instance, our bank is in a good position among private banks. There is no scope to impose a weak bank on us."

Authority to merge bank

The latest amendment of Bank Company Act 2023 empowers the Bangladesh Bank to initiate forced mergers of any bank if the board of directors and management are found to be involved in activities that go against the depositors' interest.

Soon after the amendment, the central bank in December last year introduced Prompt Corrective Action (PCA) Framework to identify weak performing banks. 

It identified 10 weak banks under the new framework that classifies troubled banks into four categories based on their non-performing loans (NPLs) and capital to risk (weighted) assets ratio (CRAR).

In February of this year, the Bangladesh Bank announced a roadmap about mergers where it mentioned that if a weak bank merges with a strong one, the employees of the weak bank will not be let go for the next three years after the merger. 

The roadmap also outlined that these mergers aim to bolster the boards of banks, address capital shortfalls, and lower operational costs.

Condition of banks

The country's banking sector experienced a steep rise in default loans by Tk25,000 crore in 2023. At the end of December last year, the total default loan in the banking sector stood at Tk1.45 lakh crore, accounting for 9% of the total loans that stood at Tk16.17 lakh crore.

Only 11 banks accounted for 93% of the staggering Tk24,419 crore in loans defaulted as of June last year. Bangladesh Bank data shows that the capital shortfall for 14 banks reached  Tk37,506 crore at the end of September last year. 

At present, 61 commercial banks and 34 non-bank financial institutions are in operation. In the year 2012, nine new banks were given licences under political consideration and all of which are still struggling to compete in the oversaturated market. 

One of those, Padma Bank, is now on the verge of collapse and has approached the government for a merger. NRB Global, another such bank, transformed into Islamic bank, renamed as Global Islami Bank. Rest of new generation banks have also been struggling to get trade finance even after a decade due to their branding of licensing under political consideration.

Ahsan H Mansur, executive director of the Policy Research Institute, said to TBS that instead of rescuing weak banks, they should be merged. 

He said the central bank should guide which bank will come under the merger. "Weak banks might resist merger, but the central bank may need to force them to participate. If they don't come forward, they can be sued or have their licences cancelled." 

The international practice is that the central bank of the country merges weak banks, said Mansur. If a sovereign bank wants to merge with another sovereign bank, that can also happen.

"If a weak bank merges with a strong one, the government will compensate the strong bank after evaluating the weak bank's losses through an audit firm. This is because the strong bank has to cover the losses for the depositors affected by these bad assets," he added.

"In such a scenario, the weak bank won't retain ownership. The losses they incur from taking on assets will be subtracted from their paid-up capital. If anything remains afterward, only then will the directors of weak banks hold shares equivalent to that amount," he clarified.

International practice in merger 

The financial stability department of the Bangladesh Bank drafted a merger guideline in the year 2019 where it assessed the merger experience of South Asian nations. 

In Malaysia, in the aftermath of the Asian crisis, the government consistently pursued the banking institutions for merger. But the call did not receive satisfactory response as the shareholders and banking institutions were more concerned in protecting their own interest. 

By this time, the imprudent lending to the property sector in the earlier prospective years accumulated huge non-performing loans in the banking sector which resulted in increase of weak and distressed financial institutions.

Under the circumstances, the Bank Negara Malaysia (central bank) had to adopt a costly rescue scheme in order to protect the public interest and restore financial stability of the country.

Although the International Monetary Fund (IMF) suggested reducing the number of banks through merger or closure, the government opposed bank closures considering huge social costs.

The government rather opted for guided merger and requested the central bank to play a proactive role in solving the issues with upholding the principle of fairness to all parties involved.

The losses, which were absorbed by the acquirer bank, were compensated by tax incentives. This fiscal cost of merger incurred by the government was still lower than the fiscal cost for bailing out weak banking institutions. Till 2010, Malaysia reduced 54 banking institutions into 10 big anchor banks.

India

In India, a total of 12 compulsory mergers took place among the public sector banks during the period 1969-1990 to amalgamate unviable units. During 1991–2010, 22 bank mergers took place in which 11 were voluntary mergers to achieve economies of scale, while the other 11 were compulsory mergers to restructure weak banks.

In December 2018, IDFC Bank, a private sector bank and Capital First, a non-banking finance company merged and renamed as IDFC First Bank.

Thailand

In Thailand, following the IMF prescription, the government merged 56 finance companies immediately and established a new bank (Radanasin) to take over the viable assets of those 56 finance companies. Later, the bank was sold to foreign investors. In addition, the government took over six private banks and merged them into three state-owned banks. 

In 1998, different measures were taken by the government, such as the closure of a bank by transferring its bad assets to an asset management company, acquiring a distressed bank by a state owned bank, and merging a distressed bank with a financial institution.