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Bank consolidation: Problems and prospects

Md Aktarul Islam
17 May 2024 19:01:46 | Update: 17 May 2024 19:01:46
Bank consolidation: Problems and prospects
— TBP Photo

The banking industry accounts for the vast majority of Bangladesh’s financial sector. The management of this industry began in 1982, with no private ownership. A total of 61 local and foreign banks have been formed here in accordance with the central bank’s requirements.

It is frequently stated that such a small economy does not require as many banks. It is a ‘paradoxical’ situation. 

For over four decades, the banking industry has contributed to the general growth of the country through growing trade and commerce in accordance with the values of a free market economy. Banks were performing well in business. However, the banking industry’s tremendous growth is currently decreasing. 

Because, like the financial market, the banking industry’s rise has reached a tipping point, with the next stage being a decline. As a result, it is time to take the required steps to prevent further deterioration and revive the banking business. The acquisitions and mergers provide an important advance in this direction.

A merger is the combination of two or more companies. As a result, new firms can be founded, and if a small company merges with a larger corporation, the smaller company may cease to exist. The shares of the new business formed in this instance are distributed to the shareholders of the combined companies. 

All of them are stockholders in the new company. When two or more firms merge under the amalgamation process, all of their assets and liabilities are transferred to the new company's accounts of finances.

Bangladesh Bank’s decision to combine or acquire as part of the essential reforms in the country’s banking system is both accurate and commendable. There is now no alternative to mergers and acquisitions as a strategy for keeping the banking industry, the country’s economic engine, functioning. 

The banking company’s stronghold should be maintained by consolidating assets and optimizing resources. However, both firms must reach an agreement.

Last month, the Bangladesh Bank authorized a road map to address several issues in the banking system. There was also the question of bank mergers. According to the central bank’s strategy, weak banks will be merged with good banks.

A country’s economy is heavily reliant on its banking sector. The banking sector plays an important role, particularly in emerging countries such as Bangladesh. Entrepreneurs in the private sector in developing countries are always short of capital. The banking sector plays an important role in assisting entrepreneurs with their capital or financial needs. In industrialized countries, the stock market is typically relied on to provide long-term capital supply. However, Bangladesh’s stock market has not yet developed in this fashion. As a result, banks are the most reliable source of finance for private enterprises. However, it is undeniable that our country’s banking sector has been afflicted by several issues. As a result, entrepreneurs do not receive the required level of support from the banking industry.

If the weak banks join with the strong banks, they will be able to restore normal operations. This could help to tackle some of the challenges in the banking sector. However, there is no guarantee that if the two banks merge, they will be in excellent health or that all of their difficulties will be resolved. We’ll have to wait and see how effective or beneficial this attempt is in resolving the issue. It may also look like two weak banks have combined. 

Then they got weaker. Or it is possible that by merging a weak bank with a powerful bank, the weak bank becomes weaker at some point. The reverse scenario is also feasible. Perhaps it was observed that the two banks can now operate effectively following their merger. In this sense, the Bangladesh Bank plays an essential role. 

What role would Bangladesh Bank play in the merger, and how will it oversee its activities? There are several legal systems for this. If the legal framework and rules are not correctly developed, the merger process may be jeopardized. The Bangladesh Bank must exercise extreme caution in this matter.

However, Bangladesh Bank has created numerous exceptions to the merger regulations. Dr. Biru Paksha Paul believes that at least one party must be interested in the job of combining the two institutions. Neither party is concerned about what is happening in the existing banking system. Both parties will survive if they can avoid such a marriage. However, unlike Parvati, ‘Devdas’ cannot speak anything in the face. They aren’t called mergers. These are “forced consolidation”. Whether it is a merger, amalgamation, or acquisition, if it is carried out professionally with the cooperation of the appropriate professionals, the benefits will follow. In this situation, the steps of proper negotiation, financial diligence, legal diligence, human resources diligence, warranty and representation, correct and final deal-making, and post-merger integration (PMI) must all be completed flawlessly.

What happens to the entrepreneurs?

Every business begins with the hope of making a profit. Nobody starts a business expecting it to fail. As a result, 100% success is not attainable. It’s the same in wealthy nations. When a firm becomes insolvent and fails to satisfy its creditors’ liabilities, it is liquidated. 

This route to annihilation is also open to banking institutions. However, because the banking corporation operates with public money or ‘public money’ and provides regulated financial services under the Bangladesh Bank, it is preferable to pursue an alternative merger and acquisition strategy rather than liquidation. 

In the event of a liquidation, all stakeholders, including the entrepreneur, face an increased risk of harm. In the event of termination, the entrepreneur’s identity also disappears. Although the merger will eliminate weak bank entrepreneurs, the losses will be minor. Therefore, it is not difficult to choose this alternative.

What happens to the depositors?

As mergers and acquisitions are corporate strategies for expanding and increasing profits, depositors’ funds are more likely to be protected in this scenario. On the other hand, if a weak bank deteriorates more and goes through liquidation, the danger of loss to depositors increases significantly. 

With the merger, weak banks’ assets and liabilities will be incorporated into the financial statements of good banks. There is no requirement for depositors to be responsible bank depositors. Aside from that, the Bangladesh Bank has stated that if a poor bank combines with a reputable bank, the management company will acquire the weak bank’s bad assets or loan assets. 

As a result, investors do not have to worry.

What happens to the staff?

When a corporation is dissolved, its employees lose their jobs. However, if a firm merges or acquires another, the human capital category workforce might be absorbed by the new company. Officers and employees who are not subject to the purchase are terminated and paid in accordance with the target company’s employment standards. 

 This writer is a student of the Department of Mass Communication and Journalism at the University of Dhaka.