Bank mergers: Central bank unprepared for such feudal marriage

When I was a student at Sydney's University of Technology, I had a witty teacher for the 'Merger and Acquisition' subject. I haven't forgotten the examples that he gave us.

He started off by saying that 'mergers' were 'love marriages'. 'Acquisition' was marriage at the behest of the groom's family where the helpless bride had no choice. 'Take over' was when the girl was abducted and forcefully married. We were young then and found these colourful examples very appealing.

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A long quarter of a century has passed since then, and now I find no similarity between the mergers imposed by Bangladesh Bank and these examples of mergers given back then by our teacher in Sydney. After all, in the joining together of two institutions, at least one side has to be willing. In the recent developments of the banking sector, no side is willing. Either side would be more that relieved if they could slip out of these nuptials. But like Parvati in 'Debdas', they can say nothing. These can hardly be called mergers. These are 'forced consolidation'.

Many insist that mergers are commonplace overseas. But the regulators there prevent these if possible. After all, mergers can lead to monopolies. These go against consumer interests. If the regulator fails to thwart such moves, the consumers go to court. The court finally decides whether these mergers are detracting from the competition in the market. If they do, then the mergers are cancelled.

If the competition is not affected, then approval is given. There are three major objectives behind the merging of two banks -- one, synergy; two, to expand the partnership marketing; and three, rebranding.

Synergy means making two plus two add up to more than four. The horsepower of a four-wheel car is more than double that of a two-wheel cycle. This synergy is used to expand market scope. One bank's technology may be better while another bank has more branches and human resources. Their merger is a marriage made in heaven. Together they enjoy economies of scale.

Such a merged bank can rebrand and create excitement among the clients. For example, the tech company Dell and EMC merged to create Dell Technologies. The oil and gas company Mobil-Exxon is an example of a massive merger. In 2009 the Bank of America bought Merrill Lynch.

The recent bank merging moves made in Bangladesh can in no way be compared to these initiatives. It is being said that they are voluntarily merging, but digging a little deeper it will be seen that Bangladesh Bank has ordered the slightly troubled banks to accept a rotten apple as a fresh orange.

A bad law first destroys character. Secondly, it ruins institutions. Thirdly, it sinks the economy. A few hundred established economists including Daron Acemoglu, La Porta and Douglass North have research on this.

These troubled banks realise if the obey the regulator's orders, they can get benefits in other areas. They can buy rotten banks at cheap rates. And it is no problem whatsoever for the central bank to change definitions and overnight redefine the troubled banks as thriving banks.

During the term of the last finance minister, certain harm was done to the character of the banking sector which is to a great extent responsible for the present pitiful predicament of the sector. One, making the board of directors a family affair; Two, repeated redefining of defaulters. The result of these two factors is an increase in looting the funds in the name of loans and, in the same equation, an increase in capital flight.

During the term of the present government, all sorts of quack remedies have been taken up to improve the banking sector, but scope has been created for yet another downfall. This has been by allowing a company of a certain group to take loans even though another company of the same group is in default. If such a law, so full of holes, remains in place, then even 33 mergers will not resolve the problem of default. There is no use of placing a huge lock on the front door with five guards on duty, if the back door is left wide open. This is just a go-ahead to keep up the looting.

A veteran beggar sits on the roadside with his platter in hand. He always tucks away the money he gets and consciously keeps his platter empty. In that way he gets people's sympathy and more money. Two friends went to a restaurant. One decided on the buffet which was a bit costly and the other chose a cheap meal. The friend who chose the buffet could take as much as he wanted and even slip some of the food onto his friend's plate. In that way the two friends had a hearty meal at the expense of the restaurant.

The new law pertaining to default loans is the same. It's like the fox showing the crocodile the same baby crocodile seven times over. The businessmen had always protested, saying if one of their companies was in default, why shouldn't their other companies get loans?

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The ownership or management is the same. If a group of industries is guilty of an offence, how can they be absolved of guilt simply by their other normal actions? A gangster commits murder and also commits theft. He may be granted bail for the theft, but he remains in jail for the murder.

For 25 long years the central bank would not grant loans to the business of an industrialist if another one of the businesses was in default. This acted as a deterrent for habitual loan default. What happened all of a sudden that this law had to be changed? This will never create scope for a willful defaulter to rectify himself.

If one business of an industrialist's 10 businesses defaults on a loan, the primary duty of that industrialist is to use his other businesses to salvage the ailing one. If that is not possible, he must resort to the bankruptcy law, dissolve that business and pay up all dues.

This legal laxity of Bangladesh Bank will damage corporate efficiency or liability. There will also be a growing propensity to falsely project certain companies of the same industrialist to be limping along. This will give more opportunities to loot from the bank funds. Bangladesh Bank in recent times has taken up certain perfunctory policies that simply serve to pitch the banking sector into further disaster.

Before plunging into the merger fiasco, the central bank should first prepare itself and fix the faulty policies of the past eight years. There is need to fix at least three bad laws. One, abolishing the law that promotes families on bank boards; two, redefining default loans, that is, cancelling the law that facilitates whitening black money; and three, abolishing the suicidal law enacted during the term of the present government that facilitates one business of an industrial group to take a loan even though another business of the group is in default.

These three bad laws were enacted during the past eight years. In this span of the time, the banking sector went from bad to worse. A bad law first destroys character. Secondly, it ruins institutions. Thirdly, it sinks the economy. A few hundred established economists including Daron Acemoglu, La Porta and Douglass North have research on this.

Are only the banks that are facing imminent collapse, responsible for their predicament? It is the central bank that is primarily responsible for a fresh apple turning rotten. After all, every bank is obliged to report to the central bank on all matters. Outside of this too, the central bank can on its own accord step up its audit and monitoring.

Bangladesh Bank is still unprepared in these areas. This regulator is also not free of guilt when it comes to making erroneous laws. Without doing proper homework, forced feudal marriages won't last long.     

* Dr Biru Paksha Pal is a professor of economics at the State University of New York at Cortland, USA.

* This column appeared in the print an online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir

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