Open new banks or go for merger?

The opinion piece titled "Open new banks or go for merger?", written by me was published in The Daily Star on October 6, 2013, while the issue of opening 7 new banks was in the market, which was in favour of banks going for merger rather than opening new ones. Although those proposed 7, along with 2 more new banks were later opened. After 3 years, today's write-up would assess the justification of opening 9 new banks. 

In that article, it was mentioned that the banking industry had already grown manifold before opening new banks. Profit percentages were made double-digits for sustaining growth and surviving and also for providing attractive returns to shareholders. However, the greed for more without appropriate platform and fundamentals brings its own challenges. 

The article described that, usually, competition in any sector brings positive development for both service providers and consumers; but excessive competition also encourages malpractice. In comparison to the size of the Bangladesh economy, 53 banks were already too many. It is obvious that a significant percentage of people in the country were still un-banked; so, to bring them into the banking system, banking services could have been expanded by opening new branches instead of opening new banks. 

While most banks offer similar services, they are competing with each other in most cases on price/yield, realistically, new entrants can gain an initial advantage and capture market share by offering higher deposit rates. Failing to maintain deposit rates, risk averseness, lack of demand for loans and spike in demand for short-term government securities provide a lower rate environment; but no relative advantage for new banks. This can create an unhealthy banking environment where regulators and customers are pitted against one another.

The popular belief is that aggressive lending may quickly help capture market share and drive a banks' profitability. But in reality, new banks fail to get any benefit by lending to the right clients. Rather, they are staring at the results of aggressive growth in lending portfolios.

It is known that some banks collect deposits to invest to their own businesses instead of lending to investors. However, lenders alone get the stated interest and the principal within the maturity date at best and receive no benefits like equity investors. This is why one must wonder why many banks even today lend to entities with no real capital; but from revaluation and other financial engineering. New banks have fallen into this temptation, which can be considered as the first nail in the coffin. Note that chasing yield and risking principal is the fastest way to go bankrupt.

The article also highlighted that unhealthy competition in the banking industry may hit the country's capital market, as the shortage of equity and deposit forces bank owners to raise funds from the capital market. In addition, it could force them to risk their position through overexposure to the volatile capital market in order to maintain profitability.

Furthermore, opening 9 new banks simultaneously could put pressure on efficient manpower demand, as they have to buy quality manpower from other banks. So, the most likely outcomes were — either end up recruiting an unqualified team due to budget constraints or end up paying a significant premium for talent. Also, recruiting weak managers' end up attracting even weaker subordinates and we all know how that works. Besides, people having no academic background in banking or finance are holding the key chairs in the leading banks, especially in the state-run banks. 

At present, the banking sector is suffering from an acute shortage of skilled professionals. Except for a few foreign and local banks, the quality of staff drops drastically. Depth and breadth of knowledge is poor. This is an ominous sign for the industry since professional human resource is essential for its growth and development. These weaknesses are obviously facilitating frauds, mismanagement, and value destruction for shareholders and encourage and breed a substandard corporate governance culture in the financial sector.

This shortage of skilled human resources also hampers creation and launching of new innovative products, which results in reduced efficiency and productivity of banks. A study shows that banks earn only 60 paisa against Tk. 100 assets. Income, on the other hand, was Tk. 7.80 against Tk. 100 equity. Thus, profit is gradually worsening over the years. 

In the recent past, various scams in state-run and some private banks have exposed the sector to risk. So, opening new banks without having enough professionals could make the sector more risky and inefficient.

According to the latest Bangladesh Bank data, 141 branches out of the 294 branches of the 9 newly-established scheduled banks are loss-making as defaulted loans continue to rise. The BB also asked them to reduce their defaulted loans and number of loss-making branches within the shortest possible time. Otherwise, they will have to face strict measures. These banks are also lagging behind the banks of the previous three generations as their deposit mobilisation and credit disbursement are lower than those of the older banks. 

Recently, a BB team found that the amount of NPLs of the nine banks jumped by 43.11 per cent or BDT 1.69 billion and that classified loans rose to Tk. 5.61 billion in the third quarter (Q3) of 2016 over 2015 as the banks disbursed loans aggressively, violating central bank rules. The BB has also asked them to strictly abide by the existing core risk-management guidelines and has appointed observers for close monitoring and supervision.

Most of the directors and chairmen of the nine banks are involved with the ruling party as the Finance Minister opined when giving permission. So they can still pressurise the regulators. The BB's inspection teams have already unearthed various types of corruption in disbursing loans by some of the new banks.

Therefore, based on the above discussion, my hypothesis of not opening new banks can be acceptable. Specialists in the financial sector, along with the Finance Minister, were against opening new banks. But he was undone. 

To me, it is obvious that the Bangladeshi banking sector is overcrowded. Therefore, mergers could have benefitted the sector. And the Finance Minister's recent comment further emphasises why it would be wise to go for it.

The writer is an economist and researcher. 

Email: mizan12bd@yahoo.com