Merging the banks for better financial governance

Reforming the Bangladesh banking sector is long overdue considering the ongoing struggles, such as liquidity issues, poor resource management, capital crises, and underperforming loans and their potential ripple effect on the economy. Forced bank mergers have been the talk of the town in recent times. But we have seen most of the "known to be good banks" quite confused and concerned about the possible measures.

Under the newly revised Bank Company Act 2023, Bangladesh Bank can mandate mergers if a bank's leadership undermines depositors' interests. The Prompt Corrective Action (PCA) framework, established in December 2023, requires banks to comply with corrective actions based on indicators like capital to risk-weighted assets ratio (CRAR), tier 1 capital ratio, common equity tier 1 (CET1) ratio, net non-performing loan (NPL) and corporate governance. Persistent decline across these indicators will designate a bank as financially weak, risking penalties or enforced mergers by Bangladesh Bank if weaknesses persist.

While successful bank mergers can improve the current situation, there are several challenges that need to be addressed first.

Firstly, bankers are concerned that the real financial picture of weak banks is not clear as there are many bad loans, which are not in the account of actual defaulters, and the actual amount of defaulted loans is much higher than the reported amount.

Secondly, there is also concern regarding identifying the actual weak banks as the banks of influential people might be left out of the list of weak banks. So may be the case with weak state-owned ones forcing the national economy to bleed for them.

Alongside, there will be general challenges like financial risks. For example, asset quality deterioration, increased operational costs and liquidity challenges, human resource and technological integration, and customer retention amid uncertainty of merger.

Therefore, there is no incentive for the good banks currently to take over the responsibilities of the weak banks as this might lead to the decline in their own financial indicators. Bangladesh Bank needs to issue specific guidelines in this regard, outlining clear incentive to motivate good banks to come forward and revitalise the sector. Failure of the regulators to bring weak or notorious banks under command or incentivise the good banks for long has raised a lot of suspicion among important stakeholders about the honesty of purpose.

While we are talking about banks' mergers and acquisitions, one should remember it's not an easy job, especially merger or integration of two or more banks when one is weaker than the other. While Standard Chartered Bank was acquiring the then ANZ Grindlays Bank in this part of the world, I worked with Andy Prebble, the-then Standard Chartered UK and Europe General Manager as well as Global Integration head, and later with Peter Sullivan, Chartered executive director for Asia Pacific. The biggest challenges we faced were the right price discovery, paying right value for brand equity, asset and liability amalgamation and systems integration. Since ANZ Grindlays was a large bank here and Standard Chartered a quite profitable bank, integration of the hearts of the people also played a key role.

We have seen almost similar scenarios when Citibank acquired KORAM Bank in South Korea, Shanghai Pudong Development Bank and Guangdong Development Bank in China, Standard Chartered acquired Bank Permata in Indonesia and sold it back to Bangkok Bank, India's Bank of Baroda merged with Dena Bank and Vijaya Bank. Citigroup bought stake in Turkey's Akbank and later had to divest. Such was the case while HSBC sold its consumer loans business in the US.

Clear guidelines from the central bank, proper valuation of the assets and liabilities, share swap modalities, congenial legal environment and political will of the government have always played great role here.

The author is a banker and economic analyst.