FOR the last couple of months, mergers and acquisitions of banks have been the talk of the town. Many developments in the banking sector have been coming to the fore at regular intervals, thanks to the central bank鈥檚 reform plan. The Bangladesh Bank, the central bank of Bangladesh, has taken the initiative to amalgamate 10 ailing banks with financially strong banks with the aim of recovering the banking sector from plunging, bringing confidence to people鈥檚 minds, reducing non-performing loans, and establishing good corporate governance. There are only a few options left for the central bank, considering the present scenarios of a few distressed banks. The option could be either the liquidation of banks or a merger and acquisition with financially strong banks. The liquidation of banks is costly and time-consuming, and the depositors of moribund banks may lose their deposits.
The merger and acquisition is the only option that the central bank has, but previous experience was not that pleasant. Earlier in 2010, two specialised government banks, which were tiny in size, got merged. The two banks, namely Bangladesh Shilpa Rin Sangstha and Bangladesh Shilpa Bank, merged together and were renamed Bangladesh Development Bank Limited, which doesn鈥檛 see success. Rather, the bank has again plunged into a deplorable condition, and the central bank is planning to merge it again with the Sonali Bank, which is now on the card. The BDBL has been struggling with high non-performing loans and a lack of corporate governance. However, no big local private sector banks have gone for mergers and acquisitions so far, so we don鈥檛 know how far this merger and acquisition will be successful and help bring good to our banking sector. Apparently, it seems that mergers and acquisitions are the only panacea for our banking sector, but some experts are of the opinion that the process is going through somewhat hastily without maintaining due diligence and formalities. Some experts have earlier questioned that, without proper guidelines in place, signing a MoU with banks is not a good sign. In the face of criticism, the central bank has issued guidelines for mergers and accusations.
Recently, as part of voluntary mergers and acquisitions, the central bank has had discussions with a few bank chairmen and managing directors and proposed that they acquire the weak banks for the interests of the country. Consequently, we have come to know through the media that some banks have expressed their willingness for mergers and accusations of weak banks, and two banks have already signed a memorandum of understanding in this connection. Very recently, financially better-positioned EXIM bank and the scam-hit Padma bank have expressed their interest in merging and signed a MoU in this regard. Earlier in December 2023, the central bank circulated a prompt corrective action plan for the financially distressed banks with a view to improving the financial indicators of those weak banks, such as capital adequacy, non-performing loans, liquidity positions, good corporate governance, etc. Since the announcement of the merger and acquisition move by the central bank, there have been mixed reactions from bank experts and economists, but one thing is agreed upon by all: 61 banks are not sustainable for our banking sector, and the number must be reduced.
The Bangladesh Bank circulated bank merger and acquisition guidelines in April. Experts and economists are criticising a few provisions of the guidelines. The guidelines have a provision that says that the directors of the acquired weak banks cannot be the directors of the merged new bank. However, it again states that the directors of acquired banks will be eligible to be directors of the merged banks after five years. In spite of bringing the directors, whose corrupt practices led the banks to their sorry state, to book, the guidelines appear to reward them. The central bank should repeal this provision and take punitive action against the corrupt directors; otherwise, the same incidents will repeat.
After the merger and acquisition, managing directors, additional managing directors, and deputy managing directors won鈥檛 be able to join merged banks and will lose their jobs. However, if the management of the merged banks wishes, they may join them. Experts say that the provision is discriminatory; managing director, additional managing director and deputy managing director have been made scapegoats. If the directors did not nakedly interfere in the banking activity and management were given authority to run the banks, the banks would not go into such a bad state.
The guidelines also state that the employees of the acquired banks will remain in the job of the merged bank company until three years of tenure. After three years, the acquiring banks may decide to retain acquired bank employees in the banks based on their performance. But as many employees of the weak banks might have been recruited through corruption and nepotism, it would be risky to have them in the merged bank without considering their merits. Retaining these inefficient employees will result in high operating costs.
The central bank also mentioned in the guidelines that the central bank and government will provide various policy support to merged banks. The central bank will provide liquidity support to these banks through its various tools. Besides, the Bangladesh Bank will give them some relaxation in maintaining capital adequacy, the cash reserve ratio, the statutory liquidity ratio and the NSFR, ctc. Those banks will get tax benefits, and they can also offload bonds to meet their liquidity needs. The government may, if required, purchase bonds to support them in meeting liquidity and capital requirements. That means the central bank and the government will support the merged banks for the sake of the acquired banks with taxpayers鈥� money. Economists and experts question the rationale behind providing taxpayers鈥� money.
Mergers and acquisitions are not panaceas for our banking sector. However, if it is implemented in the proper way, maintaining international standards with central bank oversight, it may bring expected outcomes. However, there are many risks associated with current mergers and acquisitions that should be addressed properly and taken care of. The merger and acquisition should be done for a sustainable banking sector.
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Mohammad Zonaed Emran is a columnist.