Bank mergers, acquisitions, or dissolutions?

Bangladesh has recently received approval for a loan of 470 million US dollars from the International Monetary Fund (IMF). The first installment of the approved loan has already been disbursed in favor of Bangladesh. Former Finance Minister A.H. Mustafa Kamal, after the approval of the IMF loan for Bangladesh, had stated in an interaction with journalists that Bangladesh has received the loan approval from the IMF just as it had requested. However, the former finance minister's statement was not entirely accurate because the IMF does not provide loans to any country without conditions. Perhaps the conditions for the loan might vary from country to country, being somewhat stringent or lenient.

Bangladesh had not taken any loans from the IMF in the past 12-13 years. As a result, the institution couldn't exert pressure on Bangladesh. Occasionally, they provided advice on various economic issues, but the Bangladeshi government was not obligated to adhere to all of that advice. However, due to recent economic crises, especially the alarming depletion of Bangladesh Bank's foreign exchange reserves, Bangladesh was compelled to seek a loan from the IMF. Although the IMF has approved a loan of 470 million US dollars for Bangladesh, significant conditions have been imposed. One notable condition is to revitalize the banking sector through financial sector reforms. Particularly, within a specified period in the future, the volume of non-performing loans in the banking sector should be brought down to a manageable level.

Bangladesh Bank has already initiated various banking reforms. In line with this continuity, there is an initiative to reduce the number of banks. Bangladesh Bank has announced that it will merge 7 to 10 weak banks with other banks. Economists and banking experts believe that there are even more weak banks in Bangladesh's banking sector. Therefore, arrangements need to be made for them as well. Otherwise, the initiative to merge banks will not yield fruitful results.

The Governor of Bangladesh Bank, Abdur Rouf Talukdar, has advised discussions with the top executives and individual account holders of business-oriented banks to start programs for the merger of weak banks. In this context, somewhat unexpectedly, the decision has been made for the most vulnerable bank among individual accounts, Padma Bank Limited, formerly known as Farmers Bank Limited, to merge with Exim Bank Limited. In pursuit of the merger, the two banks recently signed a memorandum of understanding. It is worth noting that Bangladesh Bank has not yet adopted any formal policy for bank mergers. Even before Bangladesh Bank's clear policy adoption for mergers, Padma Bank Limited and Exim Bank Limited have signed a memorandum of understanding to merge. Although the matter seems somewhat chaotic, it raises the question: is it like putting the cart before the horse?

Bank mergers are not a new phenomenon. In various countries around the world, mergers between commercial banks occur as per business needs. Sometimes one bank acquires another. The ongoing merger between Padma Bank Limited and Exim Bank raises various questions. Is it a merger or an acquisition? Or is it one bank being absorbed by another? Bank mergers are a long-term process. Therefore, clear policies are necessary beforehand. We need clear explanations in Bangladesh Bank's policy regarding what constitutes a merger and what constitutes an acquisition to avoid confusion and debate. Banks and financial institutions operate based on people's trust and confidence. If there's any breach in public trust, the entire banking operation could be jeopardized. Hence, considerable thought is required before making decisions regarding bank mergers and acquisitions.

It has been said before that bank mergers and acquisitions are not something new. It happens in many countries around the world. However, in Bangladesh, instances of bank mergers are not very common. After gaining independence in 1972, 10 banks previously under Pakistani ownership were merged into 4 banks under state ownership. The names of the banks were changed, and they were renamed Sonali Bank, Janata Bank, Agrani Bank, and Rupali Bank. At that time, due to particular circumstances, all the banks in the country had to undergo a name and ownership change, restructuring all the banks accordingly. However, there have been no mergers or acquisitions of any banks in the country for a long time after that.

In 2009, Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha were merged to form Bangladesh Development Bank Limited. On January 3, 2010, Bangladesh Development Bank Limited officially commenced its journey. Many assume that Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha faced adversity, leading to the initiative of merging the two banks to save them. However, the situation was not entirely as described. Both Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha were profitably managed entities. They were two specialized institutions under state ownership. The amount of non-performing loans (NPLs) in Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha was usually higher compared to scheduled banks. This was because Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha typically provided long-term loans, resulting in a higher NPL ratio.

Most loans in scheduled banks are short-term, so the incidence of NPLs is usually lower. Therefore, it would not be appropriate to consider Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha negatively solely based on their NPL ratio. At one point, there was a proposal for Bangladesh to obtain a significant loan from a development institution. One of the conditions for obtaining this loan was to merge Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha. Essentially, this was the reason behind merging Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha. Apart from this, the operations of the two institutions were quite similar. Therefore, there were questions regarding the presence of two similar institutions under state ownership.

Bank mergers are usually undertaken for the commercial development of multiple institutions. In Bangladesh, until now, instances of mergers have been rare. However, a notable event occurred when Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha were merged into Bangladesh Development Bank Limited. The circumstances surrounding this merger were quite unique; however, one aspect stood out significantly. Firstly, the previous names of the banks that were merged ceased to exist. They commenced operations under new names, such as Bangladesh Development Bank Limited. In a holistic perspective, the condition of Bangladesh Shilpa Bank was quite good. However, after the merger, none of the previous names were retained. No staff member from either institution was laid off. Even though Padma Bank and Exim Bank were merged, operations will continue under the name Exim Bank Limited. This begs the question: is it a merger or an acquisition?

Banking sector consolidation can occur in two ways. Relevant banks may voluntarily decide on consolidation through discussion and negotiation. If they do not, they may be compelled to consolidate for integration. It seems that Exim Bank and Padma Bank have decided to consolidate voluntarily. However, other banks may not follow suit. In that case, Bangladesh Bank may need to initiate consolidation efforts forcibly. Strong banks may not want to engage weaker banks in consolidation to avoid risks in the business sector. Conversely, forcibly consolidating weaker banks with stronger ones may eventually weaken the stronger banks as well, leading to concerns for both parties.

The number of banks in the country has increased significantly, a fact that anyone would acknowledge. When the approval for opening nine new banks was granted, Bangladesh Bank raised objections, but those objections were not upheld. At that time, the then Finance Minister, Abul Maal Abdul Muhith, stated that although the country did not need any more banks, the approval for nine banks was given due to political considerations. Approving bank establishment based on political considerations, rather than financial and economic considerations, is not advisable. We can see the consequences of approving banks based on political considerations directly. Consolidation of weaker banks would not solve all problems but might exacerbate the situation further.

Globally, banking systems can be categorized into unit banking and branch banking. In unit banking systems, there are numerous banks, but the number of branches is very limited. Typically, only 10 to 12 branches establish a bank, and in some cases, even 2 to 3 branches are sufficient. The United States' system is an example of unit banking. However, there is a greater risk of bank failures in this system. Bank failures are frequently reported in the United States. Branch banking systems have fewer banks but operate through a large number of branches. The British banking system is an excellent example of branch banking. Bangladesh Bank is currently managing the banking sector following the British model. However, the expansion of the number of banks in the country does not necessarily make the branch banking system an ideal solution. Bangladesh's banking system is, in fact, a mixed banking system. We need to decide which banking system to follow. To address the problems in the banking sector, we need to tackle the issues head-on.

Regardless of which system is adopted, solving the problems in this sector is not possible without political commitment. It is essential to keep this in mind for any consideration.

Author: Retired General Manager, Bangladesh Development Bank Plc and Writer on Economic Affairs.