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Factors to consider before bank consolidation

Momtaz Uddin  Ahmed

Momtaz Uddin Ahmed

Mon, 22 Apr 24

For a long time, the banking sector in the country has been plagued by various complex problems. Failures in recovering loans from defaulters engaged in fraudulent activities, inability to control internal malpractices and ensure good governance, increasing incidence of insider lending, and the proliferation of banks—all these complex issues have slowed down the normal functioning of the banking sector. It is primarily to address these problems that the decision to consolidate banks has been taken.

As an economist with experience serving on multiple bank boards, I can say that the initiative of consolidating weaker banks with stronger ones is a crucial step for Bangladesh Bank. Before merging two banks, it's essential to assess the potential benefits. The objective of consolidation is to transform two banks into a larger entity, thereby expanding the customer base. Consolidation often leads to increased efficiency in banking operations and enhances the business volume. The consolidated bank is better equipped to compete in the market and generate profitability through competitive management practices. Without considering these factors, merging two banks without any prior preparation could indeed lead to adverse outcomes. That's why I don't think bank consolidation would be successful if done without careful consideration.

Analyzing the potential outcomes before merging a weak bank with a strong one was necessary. Without proper evaluation, the merger may not achieve its intended goals. After the merger, both banks need to ensure that they can become profitable. Even without merging with another bank, one bank may absorb another through a merger. Both banks can be managed under the same management structure and run parallelly.

Regardless of whether two banks merge, careful consideration is necessary before any action is taken. This requires extensive groundwork. In addition to mergers, another initiative that can be taken is acquisition or takeover. Through acquisition, a larger or more powerful entity assumes responsibility for another entity. Strong banks may also consider the option of acquiring weak banks. However, whether through consolidation or acquisition, adequate groundwork should have been done beforehand to ensure that the initiative is executed correctly and yields the desired outcomes. Undertaking such an initiative without proper preparatory work may lead to adverse results. In fact, even the strong bank involved in the acquisition of a weak bank might end up weakened post-merger.

Bank consolidation can occur. In various countries around the world, both banks and other institutions undergo mergers and acquisitions. However, adequate groundwork is necessary in all cases. In Bangladesh, there are currently a total of 61 banks operating under both state-owned and private ownership. At one point, questions were raised about the necessity of such a large number of banks in the country's economy. Many stakeholders in the banking sector questioned whether it would be viable to establish so many banks in a small country like Bangladesh from an economic perspective. However, despite these questions being raised, many banks were established without addressing any solutions to the raised concerns. During the tenure of former Finance Minister Abul Maal Abdul Muhith, approvals were granted for the establishment of nine banks. Most of these banks have not been successful, and some have been labeled as struggling institutions. Proper monitoring and supervision of these banks' operations have been lacking since their establishment. Despite various incentives provided to these banks, they have not been managed profitably.

The subject is not entirely clear to me yet. However, based on various sources, it can be said that it might be referring to consolidation. I am somewhat familiar with Exim Bank. I have learned about the operations and financial capabilities of this bank through various means. As far as I know, Exim Bank is in a good position. They are being managed profitably. However, regarding Padma Bank, from what I have gathered through the media, this bank is not performing well at all. Since its establishment, Padma Bank has been involved in various irregularities and misconduct.

In the country's banking sector, Padma Bank is now considered the most problematic bank. If, after the consolidation of the two banks, the business scope can be expanded, governance can be ensured, and the customer base can be increased, then the consolidation process could be successful. Otherwise, the consolidation process may not yield the desired results.

After consolidation, it's imperative to increase the customer base at any cost. Because the success of a bank or financial institution depends largely on its customers. If, for any reason, the customer base does not increase, that bank will never be able to achieve success. We have to wait to see the ultimate outcome of the consolidation process. Even though two banks may consolidate, it doesn't mean they will merge into one bank. They will operate in parallel through joint management; however, we cannot currently predict what will actually happen, as the matter has not been presented clearly to the public yet.

Sonali Bank and Bangladesh Development Bank are both state-owned banks. However, they have differences in their operations. Sonali Bank primarily provides short-term commercial loans, while Bangladesh Development Bank focuses on providing long-term industrial loans. Before 2009, the Bangladesh Shilpa Bank and the Bangladesh Shilpa Rin Sangstha were merged to form the Bangladesh Development Bank. On January 3, 2010, Bangladesh Development Bank officially began its journey. It's uncertain what would happen if Bangladesh Development Bank merges with Sonali Bank because their operational focuses are different. Therefore, careful consideration is needed before any merger between these two banks. It's not reasonable to assume that all problems would be solved just by merging Bangladesh Development Bank and Sonali Bank. Instead, such a merger could potentially worsen the situation for both banks. If careful evaluation indicates that there is a high likelihood of achieving positive outcomes through the merger, then the initiative of consolidation can be pursued.

The underdevelopment of the share market in our country is indeed a complex issue with various factors at play. There is a lack of confidence among general investors in the stock market, and the interest in investing in shares of large and reputable companies is not as enthusiastic as it should be. Market manipulation is sometimes heard of, and the stock market is always fluctuating. However, the way ups and downs occur in Bangladesh's stock market is not natural.

In 1996 and 2010, there were severe irregularities and fraudulent activities in the stock market. Many small investors suffered significant losses, with some even resorting to suicide after losing their savings. However, those responsible for these scams were not adequately punished, leading to a lack of trust in the stock market among many. If confidence isn't restored among ordinary small investors, it's unlikely that state-owned banks or other institutions' shares will perform well.

Sensitive institutions like Banks and financial institutions should be managed by competent and experienced individuals. There should be no place for emotions or political considerations in this regard. Granting permission for bank establishment based on political considerations does not lead to favorable outcomes. The distress of some banks among the nine new generation banks is evidence of this.

The problem of non-performing loans in the banking sector of the country is an extremely complex issue. Despite various efforts, no solution seems to be working. According to some sources, the current amount of non-performing loans in the banking sector is 1 lakh 45 thousand crore taka. However, according to another source, the amount of non-performing loans is around 2 lakh crore Taka. But many believe that the total amount of defaulted loans including written off loans, rescheduled loans and money owed to the under-litigation projects will be close to 4 lakh crore Taka.

There could be debates regarding the actual amount of defaulted loans. The escalating rate of defaulted loans in the banking sector poses a significant risk, and there's no debate about that. Therefore, it's imperative that we strive to recover these defaulted loans at any cost. The initiative taken by Bangladesh Bank to identify willful defaulters is indeed a commendable effort. But what will happen to those who have been given the option of rescheduling defaulted loans for 10 years with a grace period of one year with a 2 percent cash down payment in the wake of various legal changes?

Many of them are willful defaulters. But due to legal obligations, they cannot be identified as defaulters. Identification of willful defaulters will not be possible until this Act is repealed. After defaulting on a loan account, maximum caution should be taken at the stage of loan approval along with vigorous efforts to collect installments from it. So that the loan account does not become defaulted at the post-approval stage. Some people purposefully take loans from banks with the intention of defaulting on them. By observing the behavior of such loan applicants, it is often possible to identify them even before loan approval. Additionally, if collateral assets are properly valued during the loan approval process, the propensity for defaulting on loans can be significantly reduced. If bankers work with integrity and sincerity in the bank's interest, it is often possible to significantly deter the tendency for defaulting on loans. Because without the cooperation of bankers, it is not easy for a borrower to default on a loan.

A certain group of dishonest bank employees may bypass regulations for their own benefit and approve loans for certain parties. It's necessary to identify who was involved during the approval of the relevant loans, whether there were any oversights or negligence on their part, alongside marking the loans as defaults. Having defaulting loans in the banking sector isn't unusual, but ensuring that the amount of defaulted loans doesn't exceed a certain threshold is crucial.

There are some borrowers who take a loan from the bank with the intention of embezzling it. If bank employees adhere to their responsibilities diligently, it's quite possible to deter this propensity. Additionally, merely examining the documents of loan applicants is not sufficient. Their mindset also needs to be scrutinized. Additionally, it needs to be ascertained whether he will actually be a good entrepreneur or take loans from banks and divert them to other sectors or embezzle the loan.

Author: Retired Professor and Chairman, Department of Economics, Dhaka University; Former Chairman, Rupali Bank PLC.; Director, Board of Directors, Bangladesh Bank, and former member, Planning Commission.

Transcribe: M A Khaleque

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