Are mergers good for stronger banks?

There have been lingering questions regarding mergers in the banking sector, whether the move is good for the country’s overall banking sector. The Bangladesh Bank has planned a roadmap for the weak banks to merge with strong banks.

Some industry insiders criticised the central bank move, claiming that the regulator is facilitating mergers quickly without proper audit reports, which would be worse for the stronger banks.

However, the central bank is yet to provide any proper explanation on how to execute the merging of banks.

Speaking to The Business Post, former lead economist of World Bank Dhaka office Dr Zahid Hussain said, “A merger is good when a stronger bank is not forced to do the move. But we are witnessing that the central bank is trying to convince the strong banks to acquire weak banks. 

“The central bank recently held a meeting with two strong banks and recommended taking over weaker banks.”

He added, “A strong bank will face a problem regarding liabilities and assets, as weaker banks have more liabilities than assets. Which bank will take responsibility? Currently, the capital of the weak banks is in the negative.

“These banks are limited companies, meaning their owners are responsible for maintaining the capital and there is no responsibility beyond that.”

Hussain pointed out, “The Bangladesh Bank is saying that asset management companies will buy the non-performing loans (NPL). If it is a government asset company, then they will buy these NPLs from the budget, so the burden will be on the people’s shoulders.

“The government might issue bonds as well. Other than these moves, there are no more alternatives.”

Policy Research Institute of Bangladesh (PRI) Executive Director Ahsan H Mansur said, “Bank merger is not a solution for the banking sector. Through mergers, the central bank is exempting the defaulters.

“Many people with influence took out loans from banks, but did not repay them. As a result, these banks became weak banks.  The Bangladesh Bank completely failed to penalise willful defaulters. Stronger banks might be affected – for example, if their share price goes down.”

“We have observed that the central bank is holding discussions with several stronger banks,” he added.

It should be noted that the struggling Padma Bank is set to be taken over by Shariah-based Exim Bank as part of the Bangladesh Bank plan to rein in the runaway defaulted loans to a reasonable level, and bring good governance to the banking sector.

Exim-Padma had signed a MoU in March to this end.

Another troubled state-owned BASIC Bank is likely to be acquired by private sector lender City Bank as the central bank is going full steam ahead with its plan to engineer the takeover of weak banks by stronger ones.

United Commercial Bank (UCB) is likely to take over trouble-ridden National Bank Ltd (NBL), according to officials of the lenders. This development came in a meeting between top officials of UCB and central bank, presided over by Governor Abdur Rouf Talukder on April 9 this year.