How 'forced' bank merger initiatives backfire
The merger idea was floated after the IMF suggested that the central bank prepare a road map to reduce default loans as part of the conditions for its $4.7 billion loan package.
Highlights
- Merger proposals floated after BB governor's informal meetings with top executives of potential strong banks
- Some of the shortlisted weak banks are now refusing to be merged
- Both World Bank and IMF express concern over the merger attempts
After World Bank, now the International Monetary Fund expressed its concern over the merger attempts between weak and strong banks – an initiative of the Bangladesh central bank which now seems backfired as banks are now refusing what they say is a "forced merger".
The Washington-based lender shared its concern with the Bangladesh delegation led by the Finance Minister AH Mahmood Ali on the sidelines of the World Bank-IMF spring meeting in Washington in the third week of April.
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The issue came up in the talks between the Bangladesh delegation with IMF Deputy Managing Director Antoinette Monsio Sayeh. Bangladesh Bank Governor Abdur Rouf Talukder was also on the team.
"Queries were made on behalf of the IMF about mergers between weak and strong banks and some concerns were raised," said an official brief prepared on the meetings in Washington for the cabinet.
In response to IMF's query, the Bangladesh side explained the rationales and processes of bank merger and informed the IMF that "none is being formally forced into merger, and such acquisition may take several years to complete the entire legal procedures," reads the brief prepared for the cabinet meeting.
Earlier, the World Bank also cautioned that imprudent mergers without a thorough assessment of asset quality may be counterproductive.
"Rapidly implementing bank mergers before addressing these issues may further undermine confidence in the sector, deterring intermediation capacity," the lender said in its latest report titled "Bangladesh Development Update, Special Focus: Strengthening Domestic Resource Mobilization".
Meanwhile, the initiative has hit snags within a month since it began.
Merger proposals were floated after a series of informal meetings between the central bank governor and top executives of potential strong banks who would merge with weak banks of their choice.
But some of the banks that were shortlisted for mergers are now backtracking.
Amid growing confusion among stakeholders and fear among depositors, the Bangladesh Bank opted for going slow on its merger plan.
It issued a circular to dispel depositors' fear as some banks, shortlisted for merger, reported withdrawal pressure.
Merger proposals: Agreeing and declining
On Saturday, the board of National Bank decided not to go for merger – two weeks after central bank's instruction to merge with United Commercial Bank Limited (UCBL).
On 9 April, Bangladesh Bank Governor Abdur Rouf Talukder called an informal meeting with UCBL Chairman Anisuzzaman Chowdhury and Managing Director Arif Quadri and advised them to merge with the crisis-ridden National Bank.
Later, the National Bank was verbally informed by the central bank about the decision, according to a bank source.
Following the central bank's verbal instruction, the merger proposal was placed in the National Bank board meeting and the board members declined to be merged, sources said.
In another instance, BASIC Bank, which was instructed informally to merge with City Bank, also refused the central bank's merger initiative.
The Bangladesh Bank governor held informal meeting with City Bank Chairman Aziz Al Kaiser and Managing Director and CEO Mashrur Arefin on 8 April and instructed them to merge with a weak bank. The City Bank authorities chose BASIC Bank to be merged with.
Finally, BASIC Bank declined to go for a merger.
When talking with The Business Standard, several top bankers on condition of anonymity said strong banks were not willing to go for merger with weak banks and be burdened with their toxic assets and liabilities.
They also said the central bank was "forcing" banks into mergers at informal meetings with top management and board members of selected banks.
How it started
The merger idea was floated after the IMF suggested that the central bank prepare a road map to reduce default loans as part of the conditions for its $4.7 billion loan package.
Abu Farah Md Nasser, who was appointed as Policy Advisor on 3 March soon after his contract as deputy governor expired, issued a merger policy, incorporating the option of "forced merger" in case shortlisted banks fail to merge voluntarily.
The policy gives boards of directors of weak banks a safe exit and keeps the option open for them to come back in the board after a five-year break. It also gives the managements of such weak banks the chance to continue their jobs in the merged entities.
The central bank provided the list of 10 banks to some good banks to choose which they want to merge with voluntarily. Should they fail to do so by January, the Bangladesh Bank will go for forced merger.
The 10 banks are BASIC Bank, National Bank, Bangladesh Krishi Bank, Bangladesh Commerce Bank, ICB Islamic Bank, Rajshahi Krishi Unnayan Bank (Rakub), AB Bank, Padma Bank, Janata Bank, and National Bank of Pakistan.
The merger will pave the way for 10 weak banks to pass liabilities of at least Tk84,000 crore – Tk54,000 crore in default loans and Tk30,000 in capital shortfall – on to good banks they will merge with.
This merger 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.
Soon after the merger policy was issued on 7 April, five banks decided to go for merger following the central bank's instruction – Sonali Bank with Bangladesh Development Bank Ltd, Bangladesh Krishi Bank with Rajshahi Krishi Unnayan Bank, City Bank with BASIC Bank, United Commercial Bank with National Bank, and Exim Bank with Padma Bank.
When the merger issue raised confusion among depositors, creating a chaos in the money market, the Bangladesh Bank suddenly came up with another announcement that it will not accept any more merger proposal for now.
"Bank mergers entail numerous procedures, including auditor appointments, asset and liability setting, determining share prices, allocation, and legal processes. This will require time," Executive Director and Spokesperson of the central bank Md Mezbaul Haque told reporters on 15 April.
"By implementing these five proposals, we at the Bangladesh Bank will gain experience."
Meanwhile, banks started to experience deposit withdrawal pressure as a consequence of merger decision.
The banking sector's deposit growth slowed down to 10.42% in February from 11% in December last year. Though, the latest deposit figure of March was not disclosed yet, a central bank official said deposit keeps sliding.
In this situation, the central bank on 23 April assured individual and institutional depositors of banks that are under the process of merger that their deposits will remain completely safe and secure.
The merger issue also impacted the stock market negatively as City Bank and Exim Bank experienced fall in share prices after they announced decisions to merge with weak banks.
