Bank merger: 5 indices to identify weak banks

Merging of weak banks with better performing ones has come to the fore anew due to the regulations of Bangladesh Bank and initiatives of various stakeholders in this regard.

Insiders have been discussing what would happen with the investors and depositors as the merged banks might get lost from the list of banks.

Policymakers gave approval to over a dozen new banks despite various types of irregularities in the sector. Apart from this, the weaker banks were helped to survive through subsidies.

Now, the central bank has decided to divide the banks into four clusters to bring back people’s trust in the banking sector and increase financial stability.

The banks that have over 5 per cent actual default loan and have less than 12 per cent of  Capital to Risk (Weighted) Assets Ratio (CRAR) will be divided into four categories.

The central bank could decide about fixing the expense limit of operating the banks, their distribution of profits, opening new branches, stopping collection of deposit and loan distribution, and regarding their merger.

The banking regulatory body announced ‘Prompt Corrective Action’ regulations in December last year. This would be implemented from March in 2025 based on the financial statements in 2024.

If the CRAR of any bank remains within 12 per cent and actual default loan rate within 5-8 per cent for six months at a stretch, it would fall in category-1. The banks of this category would not be able to share profits with the shareholders. But they could distribute bonus shares upon taking approval from the central bank.

The annual risk-based asset of these banks cannot be more than 10 per cent. And, they could increase their operation costs by 8 per cent than the previous year.

The banks with 8-10 per cent CRAR and actual default loan within 8-11 per cent for 12 months at a stretch would fall in category-2.

These banks also would not be able to distribute profits and they could raise their operation costs by 5 per cent than the previous year.

If the CRAR of any bank remains within 5-8 per cent and actual default loan rate within 11-14  per cent for 18 months at a stretch, it would fall in category-3.

These banks would be restricted from new dealings with bank-related people without any order from Bangladesh Bank. At the same time, these banks cannot open any branch or sub-branch  at home and abroad without any order from the central bank.

And, the banks with below 5 per cent CRAR and actual default loan over 14 per cent for 24 months at a stretch would fall in category-4, the worst category.

Bangladesh Bank could stop their deposit collection and loan distribution.

The Prompt Corrective Action (PCA) regulations said the banks would be categorised based on five indices. Those are - ratio of sufficiency of bank capital, tier-1 capital ratio, common equity tier (CET1), actual default loan and corporate governance or good governance.

Tier-1 capital ratio is the capital of shareholders, which is the total of the bank’s capital and money preserved from the profit. Common equity tier (CET1) is perpetual bond. Banks collect money by releasing those bonds in the market. These bonds are never exhausted. The bond buyers get a portion of profit every year.

Earlier on Tuesday, central bank’s spokesperson Mezbaul Haque at a media conference said the banks could merge with other banks voluntarily until December this year. Otherwise, the central bank would take steps to merge weaker banks with better performing ones as per its policy next year.

He, however, stated that the interests of the depositors’ will not be harmed even if any bank merges with another one while the Bangladesh Bank would take care of the interests of the investors.