For the last couple of months, mergers and acquisitions of the 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 reformation plan.
The Bangladesh Bank, the central bank of Bangladesh, has taken the initiative to amalgamate 10 ailing banks with financially strong banks with an aim to recover the banking sector from plunging, bring confidence in people's minds, reduce the non-performing loans and establish good corporate governance.
There are only a few options remaining for the Central bank considering the present scenarios of a few distressed banks. The option could be either liquidation of banks or 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 that previous experience was not that much pleasant.
Earlier in 2010, two government-specialised banks which were tiny in size merged. The two banks namely Bangladesh Shilpa Rin Shantha and Bangladesh Shilpa Bank merged and renamed Bangladesh Development Bank Limited (BDBL) which did not see success. Rather the bank has again plunged into a deplorable condition and the central bank is planning to merge it again with Sonali Bank which now is on the card.
The BDBL has been struggling with high non-performing loans and a lack of corporate governance. However, in the past no local private sector big banks have gone for merger and acquisition so far; so we do not know how far this merger and acquisition will be successful and help in bringing good to our banking sector.
Apparently, it seems that merger and acquisition is the only panacea for our banking sector and only option but some experts are of the opinion that the process is going through somewhat hastily without maintaining proper due diligence and formalities. Some experts have earlier questioned that without proper guidelines in place signing of 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 merger and acquisition, the central bank has had discussions with a few bank chairmen and managing directors and proposed them to acquire the weak banks for the interests of the country.
Consequently, we have come to know through 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 (MoU) in this connection.
Very recently, financially comparatively better positioned EXIM bank and scam-hit Padma bank board have expressed their interest to merge and signed MoU in this regard. Earlier in December 2023 last year, The Central Bank circulated a Prompt Corrective Action(PCA) plan for financially distressed banks with a view to improving the financial indicators of those weak banks such as capital adequacy, non-performing loans, liquidity positions and good corporate governance etc. since the announcement of merger and acquisition move by the central bank there has been mixed reactions from the bank experts and economists but one thing is agreed by all that 61 banks are not sustainable for our Banking sector and number must be reduced.
Bangladesh Bank circulated bank merger and acquisition guidelines in April. The ex-bankers and economists are criticising a few provisions of the said guidelines. The guidelines keep a provision and say that the directors of the acquired weak banks could not 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. The experts are of the opinion that due to the directors' shameless interface, nepotism and massive corruption practices, the banks’ health deteriorated. However, instead of bringing those directors to book, they are being rewarded. They want the central bank should repeal this provision and take punitive action against those involved directors otherwise same incidents will repeat themselves.
After the merger and acquisition, managing directors, additional managing directors and deputy managing directors won't be able to join merged banks and will lose their jobs. However, if the merged banks' management wishes, they may join those banks. The experts are saying that the provision is discriminatory, and MD, AMD and DMD have been made scapegoats.
If the directors had not nakedly interfered in the banking activity and management had been given authority to run the banks, the banks would not have been in such a bad state.
The guidelines also state that the employees of the acquired banks will retain the jobs of the merged bank company until a three-year tenure. After three years, the acquiring banks may decide to retain acquired banks employees in the banks based on their performance.
Experts are saying that in the acquired weak banks many employees were recruited based on corruption and nepotism without considering their merits. Retaining these inefficient employees will fetch high operating costs.
Apart from the above, the central banks mentioned in the guidelines that the central bank and government will give merged banks various policy supports. The central bank will give liquidity support to these banks through its various tools. Besides, Bangladesh Bank will give them some relaxation in maintaining Capital Adequacy, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), NSFR etc.
Those banks will get tax benefits and they can also offload bonds to meet up their liquidity. The government may if required purchase bonds to support them in meeting up liquidity and capital. That means the central bank and government will give support to the merged banks for the sake of the acquired banks with the common taxpayers’ money. Economists and experts are questioning the rationale behind providing the common taxpayers money.
Merger and acquisitions is not the panacea for our banking sector. However, if it is implemented in the proper way maintaining international standards with central bank oversight then it may bring expected outcomes. However, there are many risks associated with current mergers and acquisitions which should be addressed properly and taken care of. The merger and acquisition should be done for the sustainable banking sector.
The writer is a columnist
