In need of prudent bank merger strategy

Bangladesh Bank has recently unveiled a roadmap for banking sector reform. The roadmap aims at ensuring good governance, maintaining public confidence and eventually promoting stability in the financial sector. The comprehensive plan targets seventeen key issues to resolve, of which eleven are for recovery of defaulted loans and six for ensuring good governance. Five of the issues are considered specifically significant. They are: (i) reduction of defaulted loans, (ii) prevention of anonymous loans and fraudulent activities, (iii) appointment of competent directors, (iv) appointment of independent directors and (v) consolidation of weak banks through merger. To identify weak banks, Bangladesh Bank has issued a framework known as PCA (prompt Corrective Action). As per the PCA framework banks will be categorised into four groups on the basis of four indicators like Capital Adequacy, Common Equity tier-1capital, Net NPL and Corporate Governance. Besides, the Banking Companies (amendment) Act-2023 added a new section 77(A) giving power to the Bangladesh Bank to merge banks compulsorily.    

Failure of a bank leaves diverse impacts and may become too costly for the banking sector and the overall economy of a country. Besides, in democracies, along with economic and social impacts bank failure may have huge political impacts. So, to prevent failure of banks, the regulator and the government around the globe sometimes decide for liquidation or force merger of banks.

The banking sector reform roadmap in its priority has kept merging of weak banks first voluntarily and then forcibly, if required. Bank merger is a common phenomenon and widely used tool for consolidation of bank companies around the globe. Sometimes banks voluntarily agree to merge for attaining synergies, economics of scope and scale, diversification, tax savings and even to survive. The regulatory bodies or the government also direct some banks for merger in view of greater national interest. Besides, sometimes bank merger becomes inevitable when it is too late to identify the decay of a bank or financial institution timely or to cope with national and international financial crisis. Every year a good number of banks are merged in different countries around the globe, some mergers take place voluntarily and some forcibly. During the Asian financial crisis of 1997 many banks and financial institutions of different South Asian countries like Japan, Malaysia, Indonesia, Thailand, Sri Lanka and Pakistan and during American financial crisis in 2008, America merged many of its banks. Even in recent years India merged a good number of banks to ensure stability of the banking sector. In Bangladesh, through nationalisation order, reconstitution programme and directed initiatives many banks were merged, reconstituted and taken over by other banks.

The decision of merging weak banks is definitely a good move but execution of the same is a huge challenge. For making the move effective and successful some points may be taken into active consideration. The concerned authorities need to review/analyse the experiences of previous bank mergers in our country. Review of the performance of the merged banks in India in 2020 may also provide us valuable inputs. Performance appraisals of banks merged in Bangladesh reveal that private sector banks and foreign banks merger achieved satisfactory improvement in their post-merger performance. Most of the key financial indicators of these banks reflected notable development after merger. On the other hand, the state-owned bank merger in our country failed to maintain even pre-merger financial position, let alone make any improvement. At the same time, Indian Public Sector Banks (PSBs) merger in 2020 have attained remarkable improvement in almost all spheres of their operations after merger. The post-merger performance review reveals that almost all the indicators like deposit, advance, NII, and CRAR increased and NPL declined substantially from its earlier state. Only two of many financial indicators like 'other operating income' and 'percentage of maintained provision' plummeted very insignificantly. Indian authority also expects that these merged PSBs will produce more performance improvements in the forthcoming days.

Now we can look into the factors of success of private and foreign banks merger in Bangladesh and success of PSB merger in India vis-à-vis causes of failure of state owned banks' merger in Bangladesh. The key factors identified behind success of merger of private and foreign banks in Bangladesh are-- ensuring good governance and management, removing unnecessary and inefficient manpower, reengineering products and services and adopting huge technological transmission etc. In Indian PSB merger, key principle was merging with the bigger and the stronger. Along with many other factors, the principle of merger with the bigger and the stronger contributed to a large extent towards the success of Indian PSBs mergers.  Critical analysis/review of state owned banks merger in Bangladesh revealed absence of these key success factors.

As the roadmap stipulates, weak banks will be merged with strong banks. This is obviously the pre-condition of the success of merger. In doing so, necessary precautions need to be taken so that this does not set any bad precedent in the sector -- with wrongdoers willfully making their respective banks weaker in the hope of merger with strong ones. Alongside continuation of the merger process, it is crucial to ensure strong monitoring and supervision to prevent these apprehended ill motives of banking sector perpetrators. For making the most talked about bank merger move effective and successful, it is also essential to craft a well thought out merger policy first, taking into account international practices, realities of Bangladesh, the secrets of success of private and foreign banks in the country and around the globe vis-a-vis the causes of failure of banks in the country. Simultaneously, assessment of the true health of both transferee and transferor banks, taking appropriate measures for disposal of distressed assets, identifying the incentives to be provided etc are crucial. It is vitally important to identify the culprits responsible for creating anarchy and instability in the banking sector and bring them to justice for their misdeeds; otherwise the move may fail to attain expected result.

Bank merger is a big decision and complex process. If done prudently, it may pay off or it may cause peril if done haphazardly. Choosing the right partner, ensuring efficient management, rationalising manpower, expediting digitisation and ensuring adequate capital are crucial factors for success of bank merger. In executing future merger decisions concerned authorities need to pay due attention to these factors. Finally, the merger strategy of weak banks should be to resolve the problems once and for all.

Niranjan Chandra Debnath is a senior banker. [email protected]