Padma Bank sends merger or acquisition SOS
When Farmers Bank – that later became Padma Bank – was nearing collapse owing to massive lending anomalies since its inception in 2013, four state-owned banks – Sonali, Janata, Agrani, and Rupali – and the Investment Corporation of Bangladesh came up with a Tk715 crore bailout in 2018.
Now, three years into its return with the new name – Padma Bank – to salvage the lost image, it seeks either merger with or takeover by any state-owned bank without any delay, foreseeing its "possible collapse".
The bank's Managing Director Md Ehsan Khasru submitted a merger or acquisition proposal to the finance ministry on 8 July. The Business Standard has obtained a copy of the letter.
They proposed a merger with any of the five banks – Sonali Bank, Janata Bank, Agrani Bank, Rupali Bank and the Bangladesh Development Bank.
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The cash-strapped Padma Bank has now no way out other than going for a merger or an acquisition for its survival with shareholders' equities turning negative with each passing day.
A merger occurs when two separate entities combine forces to create a new, joint organisation, while an acquisition refers to the takeover of one entity by another. Mergers and acquisitions may be completed to expand a company's reach or gain market share in an attempt to create shareholder value, according to Investopedia.
As a last resort, Padma Bank tried to manage Tk2,400 crore to maintain a minimum 12.5% capital adequacy. For that, apart from Tk1,200 crore deposits of different government agencies parked with it, the bank sought to convert the agencies' Tk600 crore deposits in state-owned banks into preference shares.
Besides, Padma Bank also tried to get Tk600 crore more through issuing additional subordinated bonds.
The bank met with its 65% share owners – Sonali, Janata, Agrani, Rupali – to discuss the proposal, but the banks did not agree to it.
In this situation, people concerned think there is no alternative for Padma Bank to merging with a state-owned bank.
Padma Bank, which was set up for political consideration, became a hotbed of lending anomalies in less than a year since its inception. In three years, the bank began to sink with a burden of financial irregularities involving Tk3,500 crore. Then, it was rescued with the capital support provided by the state-owned banks and the Investment Corporation in FY18 as per the finance ministry's decision during the tenure of former finance minister AMA Muhith.
In an interview with The Business Standard in December 2019, Muhith said giving a new lifeline to Farmers Bank was not the right decision.
"I realise that it was not a right decision to save Farmers Bank, I should not have allowed it to live. I should have allowed it to die," he then told TBS.
He said he had to act on Farmers Bank because of political pressure.
"But when it was done [steps taken to save Farmers], I thought it would die eventually," the former finance minister said.
"The bank was set up by Mohiuddin Khan Alamgir, and he left it in good time. But [by that time] whatever had happened had happened. The bank was subjected to looting. It was finished," said Muhith.
Stating Padma Bank's failure to arrange capital in the letter to the finance ministry, its MD Ehsan Khasru said, "We discussed new capital investments with partner banks but could not reach any expected decision."
On the other hand, the process of converting government deposits and deposits of state-owned banks into preference shares might face legal complications. "In this situation, we think that Padma Bank needs to be either merged with a state-owned bank or acquired by any without delay," he added.
Former governor of the Bangladesh Bank Salehuddin Ahmed told TBS that the government in principle can give approval for merger or acquisition of any organisation with feeble health.
The decision on whether to merge Padma Bank, which is mired in corruption and irregularities, with a state-owned bank also depends on the attitude of the government. But, the government should be careful so that the bank's financial responsibility does not fall on it, Salehuddin said.
It is now not clear whether the merger decision is right or wrong. The government needs to review the bank's overall condition and who will take the financial responsibility, said the former governor.
The economist thinks that steps should be taken to bring back the money taken out of the bank through financial irregularities and corruption before taking the merger decision on it.
Zahid Hossain, former lead economist of the World Bank's Dhaka office, told TBS that Padma Bank is now on the verge of bankruptcy. To merge with or acquire it by a government bank means saving the bank with public money, which can not be a solution.
The bank's physical assets can be liquidated by declaring it bankrupt by complying with the procedures under the Bankruptcy Act, he said.
Zahid said no private investor will be interested in acquiring it as a bank. Merging with a state-owned bank means putting another liability on the national budget.
The bank's merger or acquisition will secure jobs of Padma Bank officials, the economist said, adding that it will not be right to nationalise or acquire it through state-owned banks.
Mentioning that when Farmers Bank started sinking, it was not right to rescue the bank by raising capital from state-owned banks, he said bankruptcy law should have been enforced then.
The Anti-Corruption Commission (ACC) had filed cases over the then Farmers Bank's lending irregularities involving Tk1,800 crore.
Mir Ahmed Salam, an ACC lawyer, told TBS that 16 out of the 18 cases are still under investigation. Chargesheets have been filed in two cases, but the trial has not started yet.
The bank's present financial health
Padma Bank resumed its journey in 2019, but its condition started to deteriorate. The bank's shareholder equity stood Tk487 crore that year, which is expected to go down below Tk100 crore this year with a gradual fall, the bank's managing director said.
In the merger or acquisition proposal, he said as of June 2021, the bank's advance-deposit ratio was 94%, which is supposed to be within 6% as per the guidelines of the Bangladesh Bank. The bank's non-performing loans at this time are close to 65% of the total disbursed loans.
According to the audited report of 2020, the bank' asset liabilities amounted to Tk5,622 crore against income-generating assets of Tk1,490. As a result, the bank incurred an operating loss of Tk160 crore.
"There are many obstacles in regularising bad loans because of rising Covid-19 infections. As a result, in June 2021, the negative operating profit margin increased to Tk120 crore, of which, the net interest margin was negative Tk71 crore," he added.
As a result of negative retained earnings, shareholders' equities in the bank's total capital dropped to Tk332 crore in 2020 from Tk487 crore in 2019 and to Tk221 crore in June 2021, the letter said.
As of June 2021, the bank's capital shortfall was estimated at Tk2,100 crore, the Padma Bank managing director said in the letter.
Pradip Kumar Dutta, former managing director of Sonali Bank, told TBS that a bank's negative equity means the bank's financial condition is very bad with no income to cover its daily expenses.
If a bank plunges into such a situation, it cannot have capacity to return depositors' money, he added.
Various government agencies are not getting back their matured deposits parked with Padma Bank despite repeated requests for cash-out.
The fixed deposits that Jiban Bima kept in the bank matured in August 2018. To cash out the deposits, the insurance company has written 31 times to it until last March, but the bank has been unable to honour the requests because of its financial constraints.
Jiban Bima Corporation managing director Zahurul Haque, Padma Bank said that it would now renew the matured fixed deposit receipts at 6% interest and pay principal amount plus interests from 2023 till 2029.
"We have accepted Padma Bank's offer as we see it as better than nothing for now to get our deposits back," he told TBS.
