All that is wrong with the proposed bank mergers
The conversation around bank mergers seems to have taken a back seat within a short period of time since the idea was first floated. Based on the recommendations of the International Monetary Fund (IMF) as part of the $4.7 billion loan programme, the government of Bangladesh has been implementing various measures in an attempt to improve the health of the economy, including reduction of non-performing loans and improving the banking sector's performance in general.
In December 2023, the Bangladesh Bank established the Prompt Corrective Action (PCA) Framework. Under this framework, the concerned bank has to carry out a schedule of corrective actions directed by the Bangladesh Bank based on selected parameter indicators including Capital to Risk weighted Assets Ratio (CRAR), Net Non-Performing Loan (NPL), and Corporate Governance. Later, in February 2024, the Bangladesh Bank presented a roadmap for bank mergers.
For all latest news, follow The Daily Star's Google News channel. As part of bank merger initiative, Exim Bank has shown interest to take over the scandalous Padma Bank, formerly known as Farmers Bank, which was on the verge of collapse due to liquidity crunch in 2017. The government came forward to rescue the bank and injected more than Tk 700 crore through four state owned banks in 2018. However, Padma Bank is still bleeding and waiting to be rescued. Meanwhile, other banks which were supposed to undergo the process of mergers have shown reluctance to be merged with weaker banks. Employees of some banks have expressed resistance towards merger as they risked job cuts.
The temporary pause on the merger initiative may be good because mergers are lengthy and difficult processes for which adequate preparation and transparency are needed. Mergers cannot be based on the arbitrary decisions of authorities. This amounts to an imposition of the liability of poor banks on well performing banks. Good banks will be apprehensive of taking such a burden on their shoulder for which they are not responsible.
Besides, the guidelines of the merger mention that the directors of the weak banks will be allowed to become board members of the strong bank after five years. However, the central bank should have identified and held accountable those responsible for the banks' weakened conditions. The provision of reinstating them on the boards of strong banks is an unearned reward.
For a merger to be successful, accurate financial reports are essential. It is crucial to objectively identify weak banks and undertake comprehensive due diligence. It involves thorough assessment of the proposed banks' financial health, profitability, asset quality, liquidity, capital, liabilities, legal issues, and cultural compatibility. Mergers should be guided by economic rationality. A strong bank should have the option to proceed with a merger with a weak bank only if it anticipates clear benefits through comprehensive financial and non-financial analyses. If the Bangladesh Bank compels a strong bank to merge with a weak bank and in return, the strong bank is provided any special policy and regulatory support, then those banks will be interested. This will create a new problem in the banking sector as the focus will be shifted to short term gains from the government.
Another issue is that bank mergers cannot result in good outcomes without streamlining operations, which involves eliminating duplicate jobs. So, there is the inevitable risk of layoffs, particularly for employees of weak banks. This concern was raised by officials and employees of the weak banks which were selected by the Bangladesh Bank for merger. Even those whose jobs would be retained after the merger will need time to adapt to the culture of the new organisation. The risk of employee integration remains, and adjustments could take a long time. Merging two banks is a complex process also because the IT systems have to be integrated, particularly with unequal adoption of technology across banks. Disruptions in operations, risk to data security due to lack of compatibilities—these are all possibilities. Therefore, a well-planned and executed IT strategy is crucial to ensure seamless technological integration of two banks.
There was also apprehension and confusion among the customers, as they were not clear what would happen to their accounts, deposits, and the quality of service they receive once their banks are merged with another bank.
Bank mergers are difficult and can come with mixed results. The key to a successful merger lies in clear strategic approach to integration that prioritises both operational efficiencies and customer satisfaction. Bangladesh has some lessons from past bank mergers where there are both successful and failed cases. The lessons learned from those initiatives have to be considered which are regulatory, technological and cultural in nature. An important issue to keep in mind is that the merger of one bank with another is an exercise of integrating two separate ecosystems, even though they belong to the same sector. Navigating this regulatory landscape requires meticulous planning. The central bank must take these into account.
Mergers should not be seen as a mechanical process. The ultimate objective of mergers should be the improvement of the health of the sector, which continues to be weakened. Though the sector has expanded in terms of the number of banks, financing instruments, and volume of assets and credit, the overall performance of the sector has been deteriorating. The poor health of the banking sector in Bangladesh is manifested through the number of high volume NPLs, which continues to rise. According to the Bangladesh Bank, as of December, 2023, the amount of total defaulted loan in the banking sector was around Tk 145,633 crore, which was equivalent to 9 percent of total outstanding loans, compared to 8.2 percent in December 2022.
Such weakness in the banking sector is the result of weak management, malpractices, and corruption in several banks, particularly those which were given licenses to operate without any feasibility assessment but on political grounds. According to the Bank Company (Amendment) Act of 2013, the central bank is tasked with granting licenses to new commercial banks based on the need for such banks, and the overall economic conditions. However, this principle is not adhered to in Bangladesh. Political influence often outweighs economic rationale. Consequently, over time, the issuance of licenses for new commercial banks has seemingly become a means for the misappropriation of public funds.
While successful mergers can bring along positive outcome in terms of reduced NPL and improved efficiency, the key issue of the banking sector remains the improvement of corporate governance, and establishment of accountability.
Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue and Non-Resident Senior Fellow of the Atlantic Council.
Views expressed in the article are the author's own.
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