This is how Bangladesh Bank will conduct forced merger

The banking companies entitled to be bidders with permission of the Bangladesh Bank will be offered various policy support to merge with another bank, according to a draft guideline on compulsory merger of banks in Bangladesh.

The Bangladesh Bank will offer incentives including regulatory relaxation regarding Minimum Capital Requirement (MCR), provisioning, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements, Liquidity Coverage Ratio (LCR) etc.

Such incentives will be offered to encourage bidder banks, which will be also called transferee banks, to bid for the transferor bank which is placed under moratorium and decided to be merged with another bank, according to the draft policy.

Other incentives suggested in the draft guideline are liquidity support, foreign exchange assistance, the option of Bangladesh Bank buying long-term bonds/debentures from the transferee bank at low rates, issuance of shares to raise capital, permission for subordinated bonds, tax incentives and goodwill as an asset.

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 them towards merger.

Bank owners were also pleased to hear about such regulatory relaxation and agreed with the Bangladesh Bank to consider mergers, said a top executive of the central bank who was involved in preparing the compulsory merger scheme.

The Bangladesh Bank is in the process of formulating a merger scheme, adhering to the draft compulsory guideline created by its stability department in 2019.

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

No suit or other legal proceedings shall be brought against the government, the Bangladesh Bank, the transferee bank or the transferor bank for any decision or transaction which was done in good faith or intended to be done in pursuance of the scheme.

How merger will be conducted: Selection criteria of a bank

The Bangladesh Bank, as part of regular monitoring, will categorise the banks into three broad groups, sound, stable and distressed, based on a set of selection criteria scores.

Sound bank: If the aggregate calculated score is equal to 80% or above, the bank will be categorised as a sound bank. This type of bank will be eligible to participate as a bidder/transferee bank in the compulsory merger process and therefore will be asked to submit an Expression of Interest (EOI).

Stable bank: If the aggregate calculated score is equal to or greater than 60% but less than 80%, the bank will be categorised as a stable bank. The Bangladesh Bank may also consider a stable bank as a bidder/transferee bank, and therefore may also be asked for EOI.

Distressed bank: If the aggregate calculated score of a bank is less than 60%, it will be categorised as a distressed bank. This type of bank will not be considered a bidder/transferee bank.

Upon reaching this threshold, the Bangladesh Bank will issue a directive to the distressed bank, instructing it to undertake necessary measures to enhance its condition and to implement preventive measures to avert a merger. If the financial status of the distressed bank fails to improve and persists for the subsequent two consecutive periods (one year), the Bangladesh Bank will recommend that the bank opt for a voluntary merger with a financially robust bank. Should the situation persist for an additional two consecutive periods (one year), the bank will be deemed eligible for compulsory merger.

However, the Bangladesh Bank, in coordination with the government, reserves the authority to bypass the observation period and instigate a compulsory merger at its discretion in the interest of the public.

The central bank will take the necessary measures to replace the management of the distressed bank and appoint an administrator. Subsequently, it will seek government approval for the issuance of a moratorium order.

As per the merger guideline, the Bangladesh Bank in December last year introduced the Prompt Corrective Action (PCA) framework 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.

In the meeting with bankers, the Bangladesh Bank asked them to take necessary measures to improve their financial health as per PCA in the stipulated period to avoid a merger.

Bangladesh Bank governor Abdur Rouf Talukder informed bank owners that at least 10 banks will be merged.

Eight banks fall in "red zone"

Meanwhile, the Bangladesh Bank identified eight local banks falling within the "red zone" in the health index, which was formulated using six distinct ratios derived from the CAMELS rating system: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk.

The eight banks are – Padma, BASIC, National, Janata, Agrani, Rupali and AB Bank.

This report has been prepared based on data from 54 banks for the past six semi-annual periods, spanning December 2020 to June 2023.

Selection of bidder/transferee bank

The Bangladesh Bank, for a compulsory merger, will invite EOI from the eligible banking companies confidentially.

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 assets and liabilities of the transferor bank.

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

Transfer of assets, liabilities and effect thereof

On and from the prescribed date, all rights, powers, claims, demands, interests, authorities, privileges, benefits, assets and properties of the transferor bank, movable and immovable, including premises subject to all incidents of tenure and to the rents and other sums of money and covenants reserved or contained in the leases or agreements under which they are held, all office furniture, loose equipment, plant apparatus and appliances, books, papers, stocks of stationery, other stocks and stores, all investments in stocks, shares and securities, all bills receivable in hand and in transit, all cash in hand and on current or deposit accounts (including money at call or short notice) with banks, bullion, all book debts, mortgage debts and other debts with the benefits of securities, or any guarantee therefore, all other, if any, property rights and assets, benefit of all guarantees in connection with the business of the transferor bank shall, subject to the other provisions of the scheme, stand transferred to, and become the properties and assets of the transferee bank.

Payment to creditors, depositors

Any sums deposited by any employee of the transferor bank with that bank as staff security deposits, together with interest, if any, accrued thereon up to the prescribed date shall be paid or provided for in full.

Every savings account or current account or any other deposit account including a fixed deposit, cash certificate, monthly deposit, deposit payable at call or on short notice or any other deposits by whatever name called with the transferor bank, the transferee bank will open with itself on the prescribed date a corresponding and similar account in the name of the respective holders thereof crediting thereto full amount including interest to the extent payable under the Scheme.

Continuation of employees' services

All the employees of the transferor bank shall continue in service and be deemed to have been appointed in the transferee bank at the same remuneration and on the same terms and conditions of service, as were applicable to such employees immediately before the close of business on the date of moratorium.

If employees of the transferor bank expressed their intention of not becoming employees of the transferee bank, will be entitled to the payment of compensation, if any, and such pension, gratuity, provident fund and other retirement benefits.

The transferee bank shall, not later than the expiry of the period of three years from the date on which the scheme is sanctioned, pay or grant to the employees of the transferor bank whose services are continued in the transferee bank, the same remuneration and the same terms and conditions of service as are applicable to the employees of corresponding rank or status of the transferee Bank subject to the qualifications and experience of the said employees of the transferor bank being the same as or equivalent to those of such other employees of the transferee bank.

Provided that if any doubt or difference arises as to whether the qualifications or experience of any of the said employees are the same as or equivalent to the qualifications and experience of the other employees of corresponding rank or status of the transferee bank or as to the procedure or principles to be adopted for the fixation of pay of the said employees in the scales of pay of the transferee bank, the doubt or difference shall be referred to the Bangladesh Bank whose decision thereon shall be final.

How BB executes compulsory merger 

Merger in the financial services industry usually takes place in two forms – voluntary and compulsory. In general, the motives for a voluntary merger of banks are to bring business synergy and economies of scale, enhance market power and growth, acquire unique capabilities and resources, diversify businesses, increase earnings and avail tax benefits.

In contrast, compulsory merger of banks is induced mostly by the regulatory authorities. The motives behind such mergers are to protect the public interest, and depositors' interest, ensure corporate governance, minimise contagion risk, mitigate the systemic crisis and thus ensure financial system stability.

However, an important factor that distinguishes banking companies from other companies is that the banks carry on their business largely with the money collected as deposits from the public and for this reason. The Bangladesh Bank has been vested with the power to ensure that banks do not undertake any activity which is detrimental to the interest of the depositors and/or the financial discipline of the country.

Merger in Bangladesh

The inception of the country's banking history was marked by mergers, leading to the emergence of six national banks following independence.

The banks are Sonali, Janata, Agrani, Rupali, Uttara and Pubali. Later two of those, Uttara and Pubali, were privatised.

Sonali: Sonali Bank was established in 1972 under the Bangladesh Banks (Nationalisation) Order, through the amalgamation and nationalisation of the branches of the National Bank of Pakistan, Bank of Bahawalpur, and Premier Bank branches located in East Pakistan until the 1971 Bangladesh Liberation War.

Janata: Janata Bank was formed in 1972 by combining the erstwhile United Bank Limited and Union Bank Limited.

Rupali: Rupali Bank was constituted with the merger of three commercial banks, Muslim Commercial Bank, Australasia Bank and Standard Bank, operated in the then Pakistan.

Agrani: Agrani Bank emerged as a nationalised commercial bank following a merger of the former Habib Bank and Commerce Bank.

Uttara: After independence, Eastern Banking Corporation was nationalised and renamed Uttara Bank.

Pubali: The bank was initially transformed from Eastern Mercantile Bank which was initiated by some Bangalee entrepreneurs in the year 1959.

Reconstructed banks

The Bangladesh Bank reconstructed and merged three private commercial banks – Eastern Bank, ICB Islamic Bank and Bangladesh Development Bank Limited.

In 1991, the Bank of Credit and Commerce International (Overseas) Limited (BCCI) in Bangladesh was reconstructed and renamed Eastern Bank Limited and the Oriental Bank was reconstructed and renamed ICB Islamic Bank in the year 2007.

In 2010, Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin Sangstha (BSRS) were merged and commenced operation as Bangladesh BDBL after obtaining fresh registration under the Companies Act, 1994.

After the global financial crisis and the Asian financial crisis, many countries including Malaysia, Indonesia, Thailand and India consolidated their banking companies and financial institutions by merger/amalgamation to create a competitive and healthy banking environment.