Padma Bank merging with Exim after failed Tk1,700cr bailout

Infographics: TBS

After failing to get back to health with the government's Tk1,700 crore bailout package, scam-hit Padma Bank is now set to merge with another private commercial bank, Exim Bank, in the country's first voluntary merger move.

The board of Exim Bank on Thursday decided to create a single entity, acquiring Padma Bank, said Md Nazrul Islam Mazumder, chairman of Exim Bank.

He said the bank will run under the name of Exim Bank after the merger, rendering the Padma Bank name obsolete.

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

Exim Bank's merger decision came a week after Bangladesh Bank Governor Abdur Rouf Talukder asked bank owners to prepare for merger either voluntarily or forced.

Bank owners were assured that they will be incentivised if they go for mergers.

Following the meeting bank owners held on 5 March with the governor, Nazrul Islam as the chairman of the Bangladesh Association of Banks (BAB) briefed journalists about the assurance.

"The governor answered our queries well. We understand that no one will be harmed by this. Weak banks will become stronger and good banks will become even better," he said.

Meanwhile, the Bangladesh Bank prepared a draft guideline on mergers, keeping the provision of incentivising strong banks interested to go for merger with weak 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.

Padma Bank's health

When Farmers Bank – which later was renamed as Padma Bank – was nearing collapse due to massive lending anomalies since its inception in 2013, four state-owned banks – Sonali, Janata, Agrani, and Rupali – and the Investment Corporation of Bangladesh came up with a Tk715 crore bailout in 2018.

The state-owned banks also invested an additional around Tk1,000 crore in the bank in other forms, such as subordinate bonds and fixed deposits.

However, the total investment of public money could not stop the capital erosion of the bank as it could not recover money from defaulters.

At the end of 2023, Padma Bank's outstanding loans amounted to Tk5,740 crore, of which Tk3,550 crore was defaulted, indicating a limited capacity for the bank to reimburse depositors. The default loan rate was nearly 47% as of June 2023.

Also, the bank recorded a capital shortfall of Tk607 crore at the end of September 2023. The total deposits of the bank stood at above Tk6,500 crore at the end of June 2023. Primary data shows that liabilities of the bank was Tk5,000 crore higher from assets.

With the provided bailout package, the government holds 65% stake in the bank. At present, state bank representatives are on the board of Padma Bank as investors. Nearly 950 employees are working at the bank.

Meanwhile, Chowdhury Nafeez Sarafat, who joined the bank as its chairman six years back soon after board reconstruction with the government's bailout package, resigned in January this year.

Sarafat became the chairman of the bank as the institutional representative of 12 mutual funds invested in Padma Bank.

The bank's managing director Tarek Reaz also resigned from the bank in September last year but the Bangladesh Bank reinstated him.

Salehuddin Ahmed, former governor of Bangladesh Bank, told The Business Standard that the banks which could not be fixed for a long time should be merged. "I think it is a good initiative that Padma Bank and Exim Bank have decided to merge voluntarily."

He said it is important to prioritise the interests of depositors during the merger process, requiring coordination between the legal and technical aspects of both banks.

"While bank mergers have occurred previously in Bangladesh, steps must align with international policies. Immediate payment arrangements should be in place for small depositors," said Ahmed.

Besides, there can be coordination with large depositors to convert their deposits into shares, he recommended.

"Padma Bank has to play a greater role in collecting money from bad customers," the former central bank chief said.

He suggested that the central bank should give concession for a lean period in keeping CRR and SLR if the liability is more than the assets of the weak bank. Besides, the central bank could offer refinancing options in certain cases and consider recapitalisation measures.

Scam past of Padma Bank

Sarafat joined Padma Bank in January 2018 after its former chairman Muhiuddin Khan Alamgir resigned from the board for his alleged involvement in financial scams involving Tk500 crore.

Alamgir was given a smooth exit from the bank through resignation and public money was injected to compensate for the scam.

Sarafat was made next chairman by the Bangladesh Bank although he was in the same board that was allegedly found involved in loan irregularities.

The 12 mutual funds which Sarafat was representing were formed from money taken from other private commercial banks. Those mutual funds could not generate return for those investor banks due to bad investment in Padma bank.

In July 2021, Md Ehsan Khasru, the then managing director of Padma Bank, submitted a merger or acquisition proposal to the finance ministry due to huge defaulted loans, an inability to return deposits, and large losses. But the merger never happened.

After proposing the merger, Padma Bank said in a press release in September 2021 that it had entered into an agreement with US-based investment bank DelMorgan and Company.

It said DelMorgan would act as the lead arranger of a $700 million investment, including $350 million in equity investments and the rest of $350 million as a credit facility. But the money did not come, according to bank insiders.

To secure funds from foreign sources, Padma Bank reportedly withheld information about accumulated losses exceeding Tk900 crore, and the central bank allegedly consented to establish a separate account without disclosing this information, as per media reports.

Also, the central bank eased regulations for Padma Bank, particularly concerning the maintenance of the CRR and SLR.

However, the bank could not raise the fund finally.

In February 2023, the ICB decided to withdraw investments from Padma Bank after not getting any return on the investment in five years. The state-owned investment corporation is now looking for strategic investors from home and abroad to sell its shares in the crisis-ridden lender.

Sarafat, neither could raise foreign funds nor recover the return from the investment that bank made into mutual funds operated under his asset management company named Bangladesh RACE Asset Management, according to bank documents obtained by The Business Standard.

Finally, he took a safe exit from the bank by resigning similar to what the former chairman of Farmers Bank Muhiuddin Khan Alamgir did after failing to return the bank to health.

The bank also removed all balance sheets from its inception from its website.

According to the Bank Company Act, it is mandatory for a bank to publish an annual report to disclose its financial health for depositors. However, the bank has no report available on the website, or central bank or in bank.

TBS contacted the public relation department for an annual report but it could not provide the document saying they don't have any report.

Regarding the matter, Executive Director of the Bangladesh Bank Md Mezbaul Haque said publishing an annual report on a bank's website was not mandatory.

"Maybe the bank was given exemption from publishing annual reports but for which year that exemption was given, that I am not sure," he said.

When asked about previous annual reports, he said "I am looking into this matter." However, he did not get back with an answer till the filing of this report