Why good banks will take liability of bad banks?

Special Correspondent : For the purpose of reforming the banking sector, Bangladesh Bank is suggesting to merge all the weak or bad banks with strong or good banks.
There are currently 61 banks in Bangladesh. Observers say that about 40 of these banks are doing well, but the condition of the remaining banks is not favorable.
If there is a weak institution in the banking sector, the entire sector is at risk and it affects the overall economy.
The central bank believes that this problem can be solved if the bad banks are merged with the good ones.
When it comes to integration, some questions come to the fore.
What is PCA?
When it comes to bank merger, the name of ‘PCA’ comes up again and again.For example, in the context of merger of weak banks, the Executive Director and Spokesperson of the Central Bank, Majbaul Haque said, “If any bank can’t fully implement the PCA, then options such as merger will also be available to the Central Bank.”
Now the question is, what is PCA? Why is it so important?
On February 5, 2023, Bangladesh Bank issued a circular titled ‘Prompt Corrective Action (PCA) Framework’. This framework was created as part of the measures to overcome the crisis of weak banks.
It also mentions that if banks fail to implement the PCA and overcome weaknesses, the central bank can take steps such as consolidation.
When will merger be?
“It’s not like the merger is happening tomorrow. It is a direction. Bangladesh Bank is asking us to prepare according to what they said in PCA,” Syed Mahbubur Rahman, Managing Director of Mutual Trust Bank, told.
The PCA framework will be implemented from March 31, 2025, said the circular. That is, from then on, the central bank will start looking at what state a bank is in.
“The PCA will be launched in March 2025. Bangladesh Bank has said that after 2025 when we identify weak banks, we will move towards merging”, said Mahbubur Rahman.
Central Bank Spokesperson Majbaul Haque told, “Our directive to the banks is to fully implement the PCA before March. However, it is not the case that the merger will take place only if it is not implemented.”
“Bangladesh Bank has other options besides this option. All options can go to Bangladesh Bank. That is what was said yesterday”, he added.
By saying tomorrow, he meant the speech given at the bankers’ meeting on 31st January.
Bangladesh Bank Governor Abdur Rauf Talukder suggested merging good and bad banks in a meeting organized with senior officials of domestic and foreign banks that day.
At the end of the bankers’ meeting, the central bank’s spokesperson Mr. Haque said, “Governor has told all the bankers that Bangladesh Bank may go through some reforms.”
Those whose condition is absolutely weak; In their case, there may be various restrictions on activities starting from loan disbursement, deposit collection, he said.
“Again, some banks may be merged”, he said, “but in the meantime, there is no possibility of merging if the financial condition of the banks improves”.
Association of Bankers, Association of Bankers, Bangladesh (ABB) Chairman and Managing Director of BRAC Bank Salim RF Hossain told, “I think the merger will start from 2026. No such regulation has come out. But it looks like it will.”
Will problem be solved?
Economists believe that merging bad banks with good banks will take some time.
Zahid Hossain, former chief economist of the World Bank Dhaka office told, “If there is a weak institution in the banking sector, the entire sector is at risk. One option to avoid this risk is merger. But how that will happen, we don’t know yet.”
Former Managing Director (MD) of Mutual Trust Bank Anis A Khan told, “There are more than 60 banks in the country. However, if you search, you will not find 60 good CEOs. Then the bank will be weak. That is why we have been talking about merging the country’s banks for a long time.”
He said, if a weak bank merges with a good bank, both institutions will benefit. Because after the merger of the two banks, it becomes bigger and stronger.
“I am a good bank. I am not going bad if a bad bank comes with me. Rather, I am getting his capital when he comes. Getting his outreach…operating cost will come down. Will run on one machine, so will save. There will be a card system. There are many such things here.”
However, in addition to receiving bad bank deposits, loans, branches, branches will also go under the good bank said Mr. eat
Bankers also feel that if a good bank joins a bad bank, the problem can be solved and the entire banking sector of the country can change.
Syed Mahbubur Rahman, Managing Director of Mutual Trust Bank said, “What I understand is that many banks are not doing well. They need to be reformed. The banking sector of Bangladesh can’t continue in the current state. It is becoming a system issue now. At the end of the day, banks are the heart of the economy. How will the country run if the economy does not run?”
“Bad banks can have poor management. Maybe his overall system is not good. A good bank can go there and identify its weak points and improve overall performance”, added Rahman.
ABB Chairman Salim RF Hossain also said that merging the two banks can be a good thing.
“There have been merger acquisitions in other countries as well. This is nothing new. It’s a destination. One has to wait at least two years to get here and banks have to prepare for it now.”
What will happen to depositors
Experts in this sector say that if bad and good banks are merged, there should not be any suffering at the level of depositors or customers.
Because when a good bank takes over a bad bank, they will consider all aspects.
Hossain said in this regard, “Merger means their (bad bank) balance sheet and your (good bank) balance sheet becoming one.” Then the good bank should also take responsibility of the depositors. If they say we will not pay the depositors, it is not.
“If the bank taking over is strong and has a good governing body, there will be no problem at the customer level. The depositors should definitely merge the matter.”
However, before taking responsibility in this case, he advised to think of good or strong banks.
He said, “Before taking responsibility, it should be seen what kind of assets the weak bank has against the depositors. Probably should be less. Because assets are less than deposits, they are weak. So, a good bank should know that the bank I am taking has ‘deposit liability’.”
Fear of being fired
Economists see no major problem in consolidating weak banks.But they are saying that a lot of people will lose their jobs if the merger happens and then it becomes a humanitarian issue.
Because, when a good bank takes over a bad bank, they will naturally want to take decisions independently in terms of staffing.
Economist Zahid Hossain said, “There is a complication with manpower here. Because here, first of all, it should be understood that those who are taking, are taking on the condition of keeping the existing staff, or on the condition of reorganizing the bank.”
But usually, no bank agrees to a merger on the condition of keeping the old employees. Because, a bank is in such danger due to negligence of its employees.
After the merger of the three banks, it is now the largest bank in Japan.
“The danger of the bank is that its existing staff is not running the bank properly. So why will the good ones fall under the obligation to keep the old workers? So, they want that freedom that I will pick the person. Because almost all weak banks lack skilled manpower”, he explained.
But still he favors integration. This former banker thinks that this decision should be taken not only in the case of private banks, but also in the case of government banks.
“Merger may also apply to public sector banks. be it What is it? Earlier, Bangladesh Industrial Credit Corporation and Bangladesh Industrial Bank became Bangladesh Development Bank. It is going very well now”, he said.
“I think – gold, crowd, silver put them together as well. Then it will be a much stronger and bigger bank. There is no benefit in keeping it like this. And those who will lose their jobs at the time of consolidation, will be given money when they leave.”
Why take responsibility for good
Economists aren’t the only ones looking at consolidation positively. Bankers are also watching it closely. But they also wonder why they should take on this responsibility.
They also say that they will not be interested in good banks unless they are given additional benefits.
Rahman said, “Bangladesh Bank may say, we will give you policy support. I mean, surely they will provide some benefit. Or why do we go? The good bank’s observation on consolidation is, for now, what’s there for us?”
If the weak banks are eventually merged, the government will give detailed guidelines on the process through which it will be done.
“When the government has said, we will give support. But we have to see what support the government will give us. It will have to wait to see. More details will be discussed when the guidelines come.”
ABB Chairman Salim RF Hossain said that when full regulation comes, it will be understood that any bank will ‘merge’ with a weak bank under any conditions.
“No bank will take, no bank will take; A bank will take on its own, or the central bank will say; It is not possible to comment on this until the policy comes out. It’s all still an idea. The regulation will come in late 2025 or early 2026,” he said.
Can’t force
The central bank has the authority to decide whether a bank will be merged or not.Bangladesh Bank spokesperson Haque said in this context, “Bangladesh Bank can also do it. Again, any bank can do it themselves. This provision is given in the Bank Companies Act.”
He said that any public or private bank is governed by the ‘Bank Companies (Amendment) Act-2023’. In that case, the rule of integration also applies to all.
But Bangladesh Bank cannot force any bank to merge.
“According to the law, they cannot force us to merge. But it is also said there, the central bank can always tell you for philanthropic work”, said the Managing Director of Mutual Trust Bank Mahbubur Rahman
Bank mergers are almost the last resort to save banks.
However, economist Zahid Hossain says Bangladesh Bank can ‘force’ the merger. Because weak banks are consolidated, when no other option is available.
“Bangladesh Bank can compel them. It is not that the government is suddenly talking about merger. He is doing everything according to a sequence. He has been given a chance before,” he said.
Consolidation is usually a last-ditch effort to save the bank. If a bank does not agree to this, the end result may be closure.
“If you don’t want to merge, the immediate option is to bring another one like the prompt corrective action (PCA) framework of the central bank and ask them to fix the balance sheet,” said Hussain.
“If not, the existing management needs to be fixed. If it doesn’t work, you have to think about changing the board. Merge if that doesn’t work either. In this case, if the merger is not interested, then the bank will have to be closed.”
But if a bank is completely closed, it does not set a good example for the country, he said.