Rehabilitating weak banks in the name of merger

Dr. Enayet Karim : Reforms or mergers in the banking sector of Bangladesh are now quite certain. Margin may start within this year. If the weak banks do not merge voluntarily during this period, it will be done under pressure from next year. Mergers are not to blame; Rather, it is an ongoing process of reforming financial markets and institutions. Reforms are required as per the need of the time i.e. demand and supply. Over the years there have been major and minor reforms in the banking sector as well as in other non-banking institutions like other pillars of the economy. Therefore, the issue of reform and merger or acquisition in the banking sector is not new.
Currently there are 61 commercial banks in Bangladesh. Among them, the first, second, third and fourth generation commercial banks have been duly licensed. The then finance minister had commented that 13 fourth generation banks were licensed for political reasons. Like other countries in the world, commercial banks are regulated institutions in Bangladesh.
However, the rate of bad loans or bad loans in the banking sector in the world is less than 10 percent, but it is like 11 percent in Bangladesh. It should be noted that the standard rate of bad loans is 2 percent all over the world.
Topic of bank merger
Large amount of bad loans in Bangladesh emerges as the biggest inefficiency of the banking sector. There are many causes of bad credit. But in Bangladesh inefficient management or moral crisis is the main reason. Notable among them are the Hallmark scam, the Basic Bank corruption, the Janata Bank loan fraud and the current Islami Bank bad loan issue. In these cases, bank officials, owners and politically influential people have been accused of involvement in loan fraud.
These scandals were not prosecuted; Instead, public banks received fresh capital support from the state treasury. Without this support, all those banks could have gone bankrupt after failing to protect people’s deposits. As a state-owned bank, the state could not avoid responsibility for that failure. But besides providing capital, the government should have ensured efficient management, prevention of misuse of politics and muscle power and proper implementation of laws. A fundamental question is who will bear the responsibility for the failure of privately owned banks. Foreign banks are doing relatively well among private commercial banks. So why are domestically owned private banks at high credit risk?
It should be noted that Bangladesh is one of the signatories of the international Basel agreement. But according to Basel-3 standards, many commercial banks in Bangladesh have not been able to maintain their adequate capital of 12.5 percent. Incentives in the banking sector during the corona epidemic, the bad loan rate of these banks has been shown in the analysis of the calculation of loan cancellation after the epidemic. With the cooperation of officials and employees, the loan in the name of the owner and non-repayment of the loan is seen as a reason for public distrust towards the bank.
Bank mergers have taken place in many countries. The number of banks in the United States is also declining. Before 2017, there were 17 nationalized banks in India. These later merged into 10 banks. Unequal competition may be the main cause of mergers in the banking sector. Smaller banks tend to merge with larger banks if they are unable to compete with larger banks. There are also formulas for determining unequal competition in the vocabulary of economics.
Profit and loss of bank mergers
The direction and implementation of the merger or acquisition may scare depositors and secondly the officers and employees of the merged bank. Depositors will be concerned about the security of their deposited deposits. However, that liability may be clearly mentioned in the consolidation policy. In this case, immoral pressure and political violence must be abandoned. One of the biggest challenges in mergers will be owner claims, as owners can seek immunity from liability.
Again, they can demand higher than market value against their capital shares. Ownership may benefit if not following proper method of share price valuation. In that case, many of the influential people can play the role of the owner’s partner. Bank merger alone is not the solution to the problem, in whose interest and under what conditions it is being done should be taken into consideration.
Although there is no clear decision on the merger so far, it is heard that the weak banks will be merged with the strong ones. Initially 15 to 16 public-private banks may be merged. According to sources in the banking industry, there have been high-level talks about merging some of the country’s Shariah-based banks with each other.
Currently, the number of Shariah-based full-fledged banks in the country may decrease from 10 to five-six in the next one-two years. A framework called ‘Prompt Corrective Action (PCA)’ has already been given by Bangladesh Bank to determine its criteria. The ranking will be done by March next year based on the four criteria of defaulted loans, liquidity, capital and governance. From then on, the merger will begin. For this, Bangladesh Bank has already ordered the top executives of all banks to form a PCA implementation committee.
According to the Bangladesh Bank Governor, the merger process is not with the board; Rather, the balance sheet will be integrated with the balance sheet. For this, the central bank has already announced a roadmap, the main goal of which is to bring down the rate of non-performing loans below 8 percent by June 30, 2026. Foreclosure of defaulted loans, strengthening recovery of foreclosed loans, formation of asset management companies in the private sector, plans to no longer give concessions to defaulters, practice of international standards in calculating the period of default have been mentioned. Among these, the target of bringing down the default rate of state-owned banks to 10 percent and the default rate of private banks to 5 percent has been set. Besides, by ensuring good governance in the banking sector, it has been said to bring down the amount of loans given beyond the limits, loans related to anonymous interests and the amount of loans distributed through fraud to zero.
According to the roadmap, new policies will be formulated regarding the appointment of independent directors of the bank, their remuneration and responsibilities. The interest of depositors and shareholders will be protected if suitable independent directors are appointed. Changes have been made in the selection process for appointment and re-appointment of Managing Director (MD) of the bank, which will be strictly implemented in future. Skilled and qualified person will be appointed as the chief executive of the bank through performance evaluation. In order to ensure corporate governance, it is mentioned in the action plan that the policies related to the qualifications and responsibilities of the shareholders of the bank will be amended.
Asset management companies (AMCs) will buy bad assets (loans) of weak banks for mergers. As a result, there is no danger of good banks going bad due to mergers. But the directors of weak banks will lose their ability to be directors of good banks. Not only weak banks with strong banks, two strong banks can merge to become stronger.
Bankers also think that if a good bank joins with a bad bank, the problem can be solved. Bank is the heart of the economy so if it does not run the country will not run. A bad bank may not have a good overall system. A good bank can go there and identify its weak points and improve overall performance.
Mismanagement and irregularities have been going on in the banking sector for a long time. Corruption in the banking sector has affected the entire economy. These reforms should allow the central bank, the regulator of the banking sector, to function independently.
The central bank wants to quickly restore good governance in the banking sector by removing political influence. To restore good governance, the governor has given instructions not to exempt anyone. Bangladesh Bank has formed a committee to restore the good governance of the bank. They talked about implementing an action plan. No political identity will be considered to catch the defaulters, he said. It is advised to hire an experienced lawyer to recover the money stuck in the case.
Finally, all sectors of the country’s economy are in a bad state. This is because of corruption and politicization. Admitting this fact, the central bank has said that bank mergers will be done apolitically to protect the banking sector. If the central bank can really do that then the country’s economy will be saved. But it remains to be seen how much that is possible in the current political situation of the country.