Banks to get policy support, regulatory relaxations for mergers

The banking companies merging with weak banks will enjoy regulatory relaxations from the Bangladesh Bank and policy support from the government.

The central bank issued a circular on Thursday introducing guidelines for mergers, both voluntary and compulsory.

Under the guidelines, one or multiple banks can merge, and non-bank financial institutions can also merge with banks.

In the case of foreign bank branches operating in Bangladesh, mergers will take place through their parent companies.

According to the guidelines, the Bangladesh Bank will offer incentives, including regulatory relaxations regarding Minimum Capital Requirement (MCR), provisioning, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) requirements, Liquidity Coverage Ratio (LCR), and Net Stable Funding Ratio (NSFR).

Other incentives suggested in the guidelines are cash liquidity support through the issuance of bonds by the central bank, permission for issuing shares to raise capital, permission for subordinated bonds, and the transfer of accumulated losses into goodwill.

Banks can seek policy support from the government by applying to the Bangladesh Bank, according to the guidelines that come into immediate effect.

Such incentives were offered because the health indicators of transferee banks may deteriorate after merging with weak banks, as stated in the guideline.

On 4 March, the Bangladesh Bank held a meeting with the Bangladesh Association of Banks (BAB), where the governor informed bank owners about the incentives to encourage mergers.

The Bangladesh Bank has already identified 10 weak banks to be placed for merger, including the National Bank, Bangladesh Krishi Bank, BASIC Bank, Rajshahi Krishi Unnayan Bank, ICB Islamic Bank, Bangladesh Commerce Bank, Padma Bank, and the National Bank of Pakistan.

Meanwhile, Exim Bank has announced its intention to merge with the scandal-hit Padma Bank.

According to the guideline, the board and management of the transferor bank will be disbanded, while regular employees will be retained by the transferee bank for the next three years. After this period, the transferee bank will have discretion to decide whether to continue employing them based on their performance and quality.

The board directors will be banned from sitting on the board of the transferee bank for five years.

Individual depositors of the transferor bank will be given the highest priority in retrieving their money from transferee banks when a new payment schedule is prepared for institutional depositors.

The Bangladesh Bank introduced the Prompt Corrective Action (PCA) framework in December last year, under which banks will be categorised based on their non-performing loans (NPLs) and Capital to Risk (Weighted) Assets Ratio (CRAR).

Banks will be categorised based on their 2024 audited financial reports, and the framework will take effect in May 2025. If banks fail to improve their health in line with PCA, the Bangladesh Bank will move to place them in a merger.

Process of compulsory merger 

The Bangladesh Bank, for a compulsory merger, will confidentially invite Expressions of Interest (EOI) from eligible banking companies.

Bidder banks are required to submit a copy of the "proposal" to the central bank, which should include the valuation of the property, as well as the assets and liabilities of both the bidder and the transferor bank.

The bidder bank will have the liberty to fix the bid price at a premium or discount on the net valuation of the assets and liabilities of the transferor bank.

If no bid is submitted within the stipulated time, the Bangladesh Bank may issue a second call for EOIs. If no bid is submitted even after the second call, the central bank, in consultation with the government, may proceed with other resolution options such as reconstruction, acquisition, suspension of business, and winding up under the relevant provisions.

Commencement of due diligence by the bidder bank

To enable the Bangladesh Bank to consider the effectiveness of the compulsory merger of banking companies, bidder banks should conduct financial and legal due diligence or assessments of themselves and the transferor banking company, subject to the approval of the central bank.

For this purpose, the bidder bank shall submit its credentials (business background, resources, net worth, etc.) and details of the team of lawyers, financial advisors, chartered accountants, valuers, etc., for conducting due diligence or assessment of the asset and liability positions of both banking companies.

Based on the findings of the due diligence, the bidder banks shall prepare a "proposal" for merger as required. The board of directors of the respective company, while passing a resolution in this regard, shall consider and approve the "proposal."

This "proposal" so passed will be treated as "price-sensitive information" within the meaning under the Securities and Exchange Commission Act 1993, read with the Securities and Exchange Commission (Subidhabhogi Byabsaye Nishiddhakaran) Rules, 1995, according to the guideline.