Will merger set the banks right?

Padma Bank, which was born as Farmers Bank, had written to the finance ministry, seeking merger or takeover by a state lender to prevent its "possible collapse" in 2021. The SOS went unheeded as there was no clear guideline for banking sector merger back then. After two and a half years, the troubled private lender now looks set to see an honourable exit as another private commercial bank, Exim Bank, has offered to acquire it.

Md Nazrul Islam Mazumder, chairman of Exim Bank, on Thursday revealed the decision of the bank's board to merge with Padma Bank and create a single entity. This announcement came in a little over a week since the central bank had explained its latest guidelines to sponsor directors of banks at a meeting. Coming out of the 5 March meeting, Nazrul Islam, who is also the chairman of the Bangladesh Association of Banks (BAB), appeared convinced by the central bank's draft guidelines that offer incentives for bank mergers.

"We understand that no one will be harmed by this. Weak banks will become stronger and good banks will become even better," he said that day.

The board of the bank that Mazumder chairs agreed on a voluntary merger with Padma Bank on Thursday. Padma Bank failed to turn around even after a Tk1,700 crore bailout package from the government.                                 

Merger decision comes a week after meeting BB governor

The merger decision of Exim Bank came a week after Bangladesh Bank Governor Abdur Rouf Talukder asked bank owners to prepare for merger either voluntarily or be forced. Bank owners were assured that they will be incentivised if they go for mergers.

When effective, it will be the country's first voluntary merger of private sector banks.      

The bank that will merge with a weak bank will be offered various policy support, including regulatory relaxation regarding minimum capital requirement (MCR), provisioning, cash reserve ratio (CRR), and statutory liquidity ratio (SLR) requirements, maintaining required liquidity coverage ratio, forex support, tax incentive, bond facilities etc, according to draft guidelines.

Will it be another bailout for a troubled bank which repeatedly failed to get back on track even after several attempts to pump depositors' money? Four state-owned banks – Sonali, Janata, Agrani, and Rupali – and the Investment Corporation of Bangladesh funnelled Tk715 crore into the cash-strapped bank in 2018.

Even then, the bank, which changed its name from Farmers to Padma to salvage the lost image, failed to stay afloat. Its managing director Md Ehsan Khasru submitted a proposal to the finance ministry in July 2021 seeking merger with any of the five banks – Sonali Bank, Janata Bank, Agrani Bank, Rupali Bank and the Bangladesh Development Bank. "In this situation, we think that Padma Bank needs to be either merged with a state-owned bank or acquired by any without delay," he wrote.

Former minister rued decision to let Farmers Bank survive

Though the Farmers Bank started as a private bank when AMA Muhith was the finance minister, he regretted his decision. In an interview with The Business Standard in December 2019, Muhith said giving a new lifeline to Farmers Bank was not the right decision.

"I realise that it was not a right decision to save Farmers Bank, I should not have allowed it to live. I should have allowed it to die," he then told TBS.

He said he had to act on Farmers Bank because of political pressure.

"But when it was done [steps taken to save Farmers], I thought it would die eventually," Muhith said.

Now, the bank looks set to see a fresh lease of life if the merger initiative comes true.

A Memorandum of Understanding will be signed on Monday between the two banks in the presence of the Bangladesh Bank governor and the bankers, Exim Bank chairman said.

He also said the decision was communicated to relevant authorities including the Bangladesh Bank, the Bangladesh Securities and Exchange Commission (BSEC), and Dhaka Stock Exchange (DSE). Exim Bank is listed on the stock market, but Padma Bank is not.

When banks are in trouble and at the risk of collapse, authorities worldwide step in to salvage them, in most cases forcefully.

Europe wrestled with bank mergers last year

Last year, a number of high profile bank mergers took place in Europe and USA in a fresh wave of banking turmoil after the 2007-08 world financial crisis. 

In March 2023, financial regulators in Switzerland brokered an emergency merger deal between two leading Swiss lenders The UBS and Credit Suisse deal. It was a $3.25 billion merger deal, but the Swiss government offered guarantees and liquidity provisions worth over $9 billion, while the Swiss National Bank provided over $100 billion in liquidity support to both the banks. Though economists and analysts were critical of such a 'bailout' for an ailing bank from depositors' or taxpayers' money.

However, the Swiss government avoided using the phrase 'bailout.' Swiss finance minister Karin Keller-Sutter had said, "This is no bailout. This is a commercial solution" to help a troubled bank survive and stabilise the situation.

Bangladesh Bank's policy advisor Abu Farah Md Nasser also does not call the incentives and relaxed provisions for liquidity and reserve ratios as 'bailout.'

"This is not a bailout. It is a scheme to enhance the business strength of banks. While weak banks can seek merger for survival, strong banks can also merge to grow even stronger," he told The Business Standard.

Credit Suisse was the second largest Swiss lender which also had to merge for survival as an economy cannot afford to see its banks collapse, because trouble in a specific bank, if not addressed timely, might spill over to other banks and lead to rapid erosion of trust in the overall banking sector. This is why American authorities also responded quickly in settling issues with Silicon Valley Bank, which fell into crisis in March 2023 creating a chain reaction on the US banks and putting faith in the global banking sector to test. American regulators, including Federal Deposit Insurance Corp. took extraordinary measures to avert a wider banking crisis by guaranteeing depositors of Silicon Valley Bank and another failed lender Signature Bank. Those were major banking failures in US history after the 2008 financial crisis.

The FDIC retained about $90 billion of the troubled bank's assets.

Will the number of banks come down?

Bangladesh's financial regulators also responded to long time calls from financial analysts that the country's economy has been burdened with so many banks and that there should be mergers and acquisition to reduce the number of banks and facilitate decent play in the banking business, the policy adviser explained.

"If the number comes down through mergers, the incidence of distressed assets will go down. Banks will be relieved of unhealthy competition in a limited market and they will have more capital to lend wisely," said Abu Farah Md Nasser, who was a deputy governor before taking the new responsibility as policy adviser to oversee the banking sector reform.

Mergers will help banks cut their overhead costs and make best use of available skills. Besides, it will give weak banks the scope to save on LC costs and thus help their clients reduce cost of import. This will also help keep the cost of imported goods and raw materials low in the local market, he explained.

Dr Md Main Uddin, professor of the Department of Banking and Insurance at the University of Dhaka, says merger becomes a viable option when a bank slips into crisis with high bad assets, poor capital adequacy and bad governance. Then a weak bank looks to join a strong bank and get salvaged, he said.

"But the history of merger in Bangladesh is not that encouraging, given the instance of two specialised state-owned banks being merged into Bangladesh Development Bank Limited in 2009. After so many years, the merged entity still sees 40% of its loan turned default," Prof Main Uddin pointed out.

One can argue that it was a merger in the public sector banks which have many limitations. In that sense the new merger proposal between two private sector banks may turn out to be different, he felt.

There are 61 banks operating in a small economy like Bangladesh. "It does not seem that the central bank has taken initiative to merge banks to reduce the number. They stepped in as there is no other alternative," Prof Main Uddin said, stressing that the success of merger initiatives will depend on proper valuation of assets and liabilities as well as transparency in the whole process. "More importantly, it has to be ensured that no one can derive undue benefit out of the merger."          

The central bank's policy adviser also finds it the right time to go for mergers. 'Let's see the initiative proceed and see how it goes," says Abu Farah Md Nasser.