The recent initiative for merging five weak banks with good performing ones has hit a snag as uncertainty emerged over the huge costs of merger and some of the particular banks expressed dissents.
It would require a huge sum of money -- roughly estimated at Tk 600 to 700 billion -- in the next five years to complete the merger of the five banks, but there is no specific plan over its sources. Adding to the woes, the merger initiative developed a crack in the confidence of depositors and prompted them to withdraw their money from the weak banks.
Against such a backdrop, the merger will take place partially, with state-run BASIC Bank and private National Bank refraining from the process for the time being, according to sources.
In a meeting with top executives of the banks on 31 January, the banking sector regulator, Bangladesh Bank, instructed the weak banks to be merged with the good ones.
Later, it was decided that the Padma Bank will be merged with EXIM Bank, while Rajshahi Krishi Unnayan Bank (RAKUB) with Krishi Bank, Bangladesh Development Bank (BDBL) with Sonali Bank, BASIC Bank with City Bank, and National Bank with the United Commercial Bank (UCB).
It was learnt that all the merger decisions were imposed on the concerned banks by the regulator, though it was supposed to be voluntary.
According to sources, depositors have pulled out nearly Tk 30 billion from the BASIC Bank since the announcement of merger, exacerbating its financial crisis.
The bank’s board of directors formally wrote to the regulator, expressing its unwillingness to merge with another private bank. Its officials, who are mostly relatives of political influentials and were recruited during the chairmanship of Sheikh Abdul Hye, also strongly opposed the merger initiative.
Meanwhile, the National Bank held a press conference on Monday and declared not to immerse in the UCB under the regulatory initiative. In further development, the central bank dissolved the National Bank board and formed a new board immediately, but the bank’s decision on merger remained unchanged.
According to sources, an influential businessman is manipulating the decisions of the National Bank, while the owners as well as some influential borrowers of the remaining banks are working against the merger initiative.
The central bank guidelines stipulate that it needs to evaluate the particular banks' assets before going for merger, so that all defaulted and anonymous loans are exposed during the audit. It is another fact behind the hindrances to the merger initiative.
Earlier, the International Monetary Fund (IMF) formally objected to the merger of banks. An IMF delegation who are now visiting Dhaka reiterated their stance and pointed out the huge cost of mergers. They even called into question such a big expense against the banks that deserve to be closed.
Huge cost
The Indian finance minister, Nirmala Sitharaman, declared to transform 10 government banks into four strong ones on 29 August in 2019. She also announced an INR 550 billion capital support for the merger process.
In 1998, some East Asian nations, including Thailand, Malaysia, Indonesia, and South Korea, reaped benefit from forceful merger of banks. Thailand spent $4.3 billion to reform its banking sector, while Indonesia spent $4 billion and Malaysia $1.3 billion.
In a similar process, Bangladesh will have to pay a whopping sum of money to the concerned banks as capital support. Some banks have already informed the Bangladesh Bank regarding the amounts they require in the process.
The amounts are yet to be finalised, but insiders estimated the costs to be Tk 600 to 700 billion in total.
There are also questions regarding the funds’ sources. If the costs are paid with the revenue budget, the burden will be passed on to the people in the form of tax. In the alternative reality, the Bangladesh Bank will have to print local currency to bear the costs, which eventually would deteriorate inflation.
Zahid Hussain, former lead economist at the World Bank’s Dhaka office, observed that the mergers do not seem to be well-thought initiatives; rather more likely to be informal initiatives.
“The announcement came first, then came the policy. As being discussed, it under no circumstance is a voluntary process, but imposed. It created panic in the banking sector, including the depositors and the employees,” he explained.
The eminent economist further noted that the influential owners of weak banks are not interested in merger due to the fact that they might not be spared under the current process. The defaulters and those who are responsible for the current state of the banks may get exposed.
He also mentioned the calls of the World Bank and the IMF regarding the quality assessment of the weak banks' financial holdings. Besides, he noted that the weak banks have higher financial liabilities than their assets.