Board members and top executives of the banks and financial institutions that will see a merger will not be able to hold any position in the acquiring entity, said the Bangladesh Bank (BB) yesterday as it issued a guideline.

The guideline, which keeps provisions for both mutually agreed and forced mergers, says priority must be given to continuing the accounts of depositors of the merged entity or returning their funds.

Read more

Merger of banks: Who wins, who loses?

No employees of the merged entity could be fired within three years of a takeover by the acquirer, said the BB.

The guideline comes four months after the BB issued the Prompt Corrective Action (PCA) framework to give a procedural direction for mergers and acquisitions amidst the deteriorating financial condition of some banks and financial institutions.

In the case of forced mergers, the BB will proceed in phases.

First, in the light of PCA, it will identify banks in four categories based on their disbursed loans, profits and other indicators before directing weak lenders to improve their performances in 12 months.

If the situation does not improve and the vulnerabilities continue, the central bank will ask them to merge voluntarily with another bank or financial institution.

The BB will step in and initiate the process of a forced merger if weak entities keep suffering from capital shortfall, high non-performing loans, and liquidity shortage.

The BB guideline comes after Shariah-based Exim Bank agreed to take over struggling Padma Bank. It also asked four state banks -- Bangladesh Development Bank Ltd, Sonali Bank Rajshahi Krishi Unnayan Bank and Bangladesh Krishi Bank -- to combine their operations in its bid to reduce vulnerabilities in the banking sector suffering from high default loans and a lack of good governance.

For the mutually agreed merger, the guideline said interested banks and financial institutions will have to secure approvals from their boards before seeking the primary consent from the BB.

The central bank will later appoint an auditor to carry out audits of the proposed merged entity in order to perform due diligence. Lenders will need to hold a special meeting to receive consent from majority shareholders prior to seeking the final nod from the central bank.

Acquiring companies will have to establish separate units or take measures to realise loans of acquired entities.

In the case of a forced merger, the BB can appoint an administrator by dissolving the board of the weak banks or financial institutions. Later, the regulator will seek bids from interested buyers.

If the tender process turns out unsuccessful, the BB can ask one bank or more than one bank to acquire the weak financial institution.

According to the guideline, the BB can make decisions to settle claims of depositors or shareholders of merged entities as it thinks fit.

For a voluntary merger, the BB and the government will provide incentives to the acquiring institution because the financial health of the sound bank may be impacted adversely because of the merger.

The buyer will also enjoy relaxed rules for a specific period when it comes to keeping the cash reserve ratio, the statutory liquidity ratio, the liquidity coverage ratio, and the net stable funding ratio, the guideline said.

The central bank will extend liquidity facilities on a priority basis under the existing facilities and will provide cash by purchasing its long-term bonds.

The acquirer will enjoy facilities from the banking regulator to issue shares, perpetual bonds and subordinated bonds to expand the capital base.

Special policy assistance is likely to be extended by the government following the application of the central bank in the case of a voluntary merger.