An overview of the Bangladesh Bank’s decision to merge weak banks with strong ones.
After the International Monetary Fund (IMF) suggested that the central bank of Bangladesh prepare a road map to reduce default loans, a condition for an IMF loan package worth USD 4.7 billion, the Bangladesh Bank announced plans to merge weak banks with strong banks.
In the first wave of discussions, 40 out of 61 banks were deemed to be in good condition. Of the remaining, 8 to 10 banks were asked to merge with the strong banks. The weaker banks would be identified based on their capital adequacy, high non-performing loans, liquidity and governance.
The Bangladesh Bank is implementing a year-long Prompt Corrective Action (PCA) for the mergers. The government has endorsed this approach, under which the central bank will categorise the beleaguered banks as vulnerable.
STATE OF BANKS
In 2023, the banking sector experienced a steep rise in default loans by BDT 25,000 crore in 2023. By the end of 2023, the total default loan of the banking sector stood at BDT 1.45 lakh crore, accounting for 9% of the total loans that stood at BDT 16.17 lakh crore. As of June of 2023, only 11 banks accounted for 93% of the BDT 24,419 crore in loans defaulted. The capital shortfall for 14 banks reached BDT 37,506 crore at the end of September 2023.
There are 6 commercial banks and 34 non-bank financial institutions in operation. Nine new banks were given licenses in 2012 under political consideration, all of which are struggling to compete in an oversaturated financial market.
In March 2024, the central bank identified 38 banks including 6 state-owned banks as weak lenders. In total 54 banks were analysed. The banks in the ‘Red Zone’ are the worst or poor, the banks in the ‘Yellow Zone’ are weak, and the banks in the ‘Green Zone’ are in good condition. Twelve banks are in critical condition, nine of which have already moved to the red zone. Three out of 29 banks in the yellow zone are close to the red zone. Only 16 banks, including 8 local ones are in the green zone.
MERGER INCENTIVES
The Bangladesh Bank will offer incentives including regulatory relaxation regarding Minimum Capital Requirement (MCR), provision, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), and Liquidity Coverage Ratio (LCR). According to the draft policy, the incentives will be offered to encourage bidder banks to bid for transferor banks placed under a moratorium. Additional incentives are liquidity support, foreign exchange assistance, issuance of shares to raise capital, permission for subordinated bonds, and tax incentives and goodwill as an asset.
The draft guideline outlining the incentives also mentioned that the board and management of the transferor bank will be disbanded while regular employees will be retained for three years by the transferee bank (bidder bank). It is at the discretion of the transferee bank whether to retain those employees based on their performance and quality. No suit or other legal proceedings can be brought against the government, the Bangladesh Bank, the transferee bank or the transferor bank for any decision or transaction to be done in good faith or intended to be done in pursuance of the scheme.
MERGER SPECIFICS
Banks will be categorised into three broad groups – sound, stable, and distressed, based on a scoring system. If the aggregate calculated score is equal to 80% or above, the bank will be categorised as a sound bank. Sound banks are eligible to participate as a bidder/transferee bank in the compulsory merger process and they will be asked to submit an Expression of Interest (EOI).
If the aggregate calculated score is equal to or greater than 60%, but less than 80%, the bank will be categorised as a stable bank. These banks may also be considered a bidder/transferee banks and may also be asked for an EOI.
If the aggregate calculated score of a bank is less than 60%, it will be categorised as a distressed bank that will not be considered a bidder/transferee bank.
Distressed banks will be issued directives instructing them to undertake necessary measures to enhance their condition and to implement preventive measures to avert a merger. If the financial status of the distressed bank fails to improve and persists for the subsequent two consecutive periods (one year), the Bangladesh Bank will recommend that the bank opt for a voluntary merger with a financially robust bank. Should the situation persist for an additional two consecutive periods, the bank will be deemed eligible for a compulsory merger.
MERGER PROPOSALS
For the time being, Bangladesh Bank will focus on five merger proposals it has received so far. State-run Sonali Bank wants to acquire Bangladesh Development Bank Ltd. Bangladesh Krishi Bank wants to take over Rajshahi Krishi Unnayan Bank. City Bank, a private commercial lender, wants to acquire state-run BASIC Bank. United Commercial Bank Limited plans to buy National Bank. Exim Bank has also proposed to absorb Padma Bank. While the spokesperson of the Bangladesh Bank has stated that the mergers are voluntary, industry insiders have doubts.
WINNERS AND LOSERS
The merger will pave the way for weak banks to pass liabilities of at least BDT 84,000 crore to BDT 54,000 crore in default loans on to good banks they will merge with. If all 10 weak banks are merged with good ones, the plan may bring down default loans to 5% from the existing 9% and clean the balance sheets of weak banks as per the ceiling set by the IMF for 2026 as part of the condition for its loan package.
The general stock investors are expected to initially face difficulties while loan defaulters might come out victorious. It is very difficult for weak banks to come out of unsustainable levels of NPLs and weak corporate culture, meaning the acquirer bank will need to reshuffle business priorities and take on a monumental task. Stock investors of acquirer banks might also suffer as their shares may take a beating given that acquirers may fail to retain their consistency in giving out dividends.
The government has plans to purchase some of the NPLs to reduce the burden on acquirer banks. However, the money for this purchase will come from the taxpayers who are unlikely to approve such a move that will benefit large loan defaulters. Therefore, the bank merger proposition, which ultimately is aimed at stabilising the nation’s financial situation and thereby its people, might end up causing the general public the biggest burden.
The World Bank has already asked the authorities in Bangladesh to be more cautious during bank mergers and comply with international rules and regulations throughout the process.
