At the behest of Bangladesh Bank, a decision has been taken to merge certain weak banks with relatively robust ones as part of a move to bring about reforms in the country's banking sector. So far a decision has been taken to merge eight banks -- private sector Padma Bank with Exim Bank, BASIC Bank with City Bank, state-owned Rajshahi Krishi Unnayan Bank with Krishi Bank and Bangladesh Development Bank Limited or BDBL with Sonali Bank.
The question is, will the bank sector problems be solved simply by merging the weak banks with the relatively strong ones? The banks in Bangladesh have become weak for certain specific reasons, which include influential business groups taking loans from banks and not repaying the loans; resorting to direct fraud to filch the loans; becoming an owner of a bank with minimum capital investment and looting millions of taka belonging to the people; taking bank loans and looting the banks by offering all sorts of benefits to politically appointed MDs and boards of directors; the ruling coterie and state machinery aiding and abetting in looting the banks, indulging corruption and irregularities, not taking the looters to book, not recovering default loans, restructuring loans on easy terms, pouring in taxpayers money year after year into the looted banks, and so on.
Will not the relatively good banks be put at risk if they are merged without at first resolving the reasons for the weaknesses in the banking sector and nabbing those responsible for this predicament? There are also questions as to how good the so-called good banks are.
At the end of December 2023, of the Tk 314.87 billion (Tk 31,487 crore) of the loans disbursed by Krishi Bank, Tk 39.8 billion (Tk 3,980 crore) was in default, that is, the rate of default loans was 12.64 per cent. And capital deficit stood at Tk 133.63 billion (Tk 13,363 crore).
In this span of time, of Sonali Bank's Tk 930.96 billion (Tk 93,096 crore) in loans, default loans stood at Tk 131.5 billion (Tk 13,150 crore), that is, 14.13 per cent of the disbursed loans.
These banks themselves are afflicted with default loans. Won't merging them with weaker banks make matters worse? Recently Bangladesh Bank drew up guidelines regarding the merger of banks-companies. The manner in which these guidelines speak about the bank mergers, gives rise to strong apprehensions.
Firstly, the guidelines have no mention of any initiative to identify and take action against those responsible for the crisis in the weak banks. Not only that, but the Bangladesh Bank guidelines give scope to owners and directors responsible for the bank sector crisis, to be appointed as directors of the acquired banks.
The bank-company merger guidelines mention that after five years passes, the shareholders of the bank that has been handed over, subject to having the qualification and capability, will be able to become directors of the board in proportion to their shares.
It is also said that the board of directors of the merged banks/companies can, if they deem fit, appoint the dissolved company's managing director, additional managing director and deputy managing director on new contract to any suitable posts. These clauses provide impunity to these who are responsible for weakening the banks.
Two state-owned financial institutions mire in default loans -- Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin Sangstha (BSRS) -- were merged in November 2009 to form Bangladesh Development Bank Limited (BDBL) plc. But that did not resolve the default loan problems. New default loans emerged alongside the old ones
Secondly, the guidelines state that to ensure stability of the banking sector in public interest, Bangladesh Bank will provide all sort of policy assistance to the acquired banks, granting exemptions for a certain period of time in maintaining minimum capital, cash reserve ration, statutory liquidity ratio, net stable funding ratio, etc; the accumulated losses of the handed over company will be given scope for adjustment as a goodwill gesture; providing liquidity facilities on priority basis; providing cash assistance by purchasing long-term bonds; issuing shares, perpetual bonds and sub-ordinated bonds to increase capital, etc. So the owners and directors of the acquired banks are benefitted in all sorts of ways. The directors are given impunity and can return to the board after five years. So what guarantee is there that there will be no secret behind-the-scene deals to give the owners of the handed-over banks the scope to run the banks again after a certain time?
Thirdly, while the risk of the default loans of the weak banks and other liabilities are acknowledged, there are no specified guidelines of how these risks will be absolved after the mergers.
The guideline only mentions that it must be ensured that the loans of the handed over banks are not sent into default and that necessary initiatives must be taken to this end.
The question is, why will the management of a private bank want to take on the liabilities of huge default loans? Will simply forming a separate unit to recover the default loans be the answer? Sonali Bank or Krishi Bank can't recover their own default loans properly, how will they recover the default loans of BDBL or RAKUB?
It is being said that an asset management company will buy these default loans. Who will own this asset management company? With whose money will these default loans be purchased?
If the asset management company is formed under government ownership, then it means that the default loans will be purchased with public money, while the defaulters are given impunity and the shareholder of the acquired banks given benefits. If the government company buys the default loans with the people's money, it won't be able to recover the loans, just as the huge default loans with the state-owned banks are not being recovered.
There mergers of financial institutions in the country that took place in the past did not have positive outcomes either. Two state-owned financial institutions mire in default loans -- Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin Sangstha (BSRS) -- were merged in November 2009 to form Bangladesh Development Bank Limited (BDBL) plc. But that did not resolve the default loan problems. New default loans emerged alongside the old ones.
According to Prothom Alo reports, BDBL's loans by the end of December 2023 stood at Tk 23.13 billion (Tk 2,313 crore) of which Tk 9.82 billion (Tk 982 crore), that is 42 per cent, was in default. Bangladesh Bank appointed observers to the bank, to no avail.
Under such circumstances, if the banks are merged without addressing the main causes of irregularities and corruption in the banking sector, not ensuring accountability of the policymakers and not identifying and taking action against the responsible persons, then there remains the fear of the irregularities and corruption being merged too.
* Kallol Mustafa writes on energy, environment and development economics.
* This column appeared in the print and online edition of Prothom Alo and has been rewritten for the English edition