Stakeholders in banks, including shareholders, directors, depositors, and employees, are concerned about the potential ramifications of bank mergers.
Employees fear losing jobs, directors fear losing their positions due to limits on the number of directorships, shareholders are anxious about share price dilution, and depositors fear losses and delays in accessing their deposits.
Merging two banks is complex as well as challenging, and the success of the merger depends on how well the integration is managed, experts said.
Any disruptions to operations could impact people related to the business, they added.
BB’s Prompt Corrective Action Framework, a procedural guideline for mergers, is scheduled for implementation in March 2025, based on performance and financial indicators as of December 2024.
Under the policy, about 21 banks out of 61 could fall into the weak banks category, BB officials feared.
When two banks merge, they combine their operations and assets to form a single, larger entity.
In this process, the weaker bank’s assets, liabilities, and operations are transferred to the acquirer bank. Shareholders of the weaker bank usually receive shares in the stronger bank as compensation.
In a typical merger scenario, the weaker bank is usually valued lower than the stronger bank, which means that shareholders of the weaker bank receive fewer shares in the stronger bank than the number of shares they currently hold in the weaker bank.
Therefore, the shares of both banks’ shareholders can be diluted.
Shareholders of the stronger bank may also experience dilution due to the issuance of additional shares to shareholders of the weaker bank to accommodate the exchange ratio, reducing their share of future profits and dividends.
Therefore, a merger between stock exchange-listed banks or a listed bank and a non-listed bank can have significant implications for shareholders and depositors, as experts have indicated.
Shares in a non-listed company are generally less liquid than those in a listed company. If the acquiring bank is a non-listed one, shareholders may find it more challenging to sell their shares quickly and at a fair price.
Shareholders of a weak bank may see the value of their shares decrease, especially if the merger terms are unfavourable to them. Shareholders of the acquiring bank may also experience share price volatility as it acquires a weak bank.
There are currently 36 listed banks and 25 non-listed banks.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, told New Age that the benefits of merging banks depend on how systematically the government merges banks.
There should be a comprehensive audit of a bank’s assets, liabilities, anonymous loans, and default loans for merging banks.
Merging a weak bank with another weak bank would not bring any good, while a good-performing bank would not want to take over a weak bank carrying too many risky assets.
Therefore, mergers of banks wouldn’t be an easy task for the central bank, he said.
The government may have to provide a colossal amount of subsidy against non-receivable loans of a weak bank to the acquirer in order to convince it and ensure depositors’ interest.
If a good bank takes over a weak bank, it would be a relief for the errant bank, he said.
Zahid Hussain, former lead economist of the World Bank’s Dhaka office, said that mergers might not bring a magical solution for the prevalent anomalies in the banking sector.
He echoed Mansur, saying that the success of the merger would depend on the process of the merger.
BB spokesperson and executive director Md Mezbaul Haque said that BB initiated banks’ mergers to improve governance and minimise irregularities and NPL in the banking sector.
Taking over weak banks by strong banks will enhance depositors’ trust and confidence, he added.
The Bangladesh Bank, under the recently amended Bank Company Act, has been authorised to enforce mergers and restructurings of weak banks to protect depositors’ interests, he said.
He said that depositors and employees shouldn’t be worried as they would get their money timely and there would be no head cut within three years of the merger.
Bankers said that after a merger, the acquiring bank might change the terms and conditions of accounts held by depositors.
This could include changes to interest rates, fees, and minimum balance requirements, which could affect depositors.
The acquiring bank will integrate the accounts of the weak bank’s depositors into its systems. Depositors may need to update their account information and familiarise themselves with the acquiring bank’s services and policies.
Mergers can lead to disruptions in banking services, such as online banking, ATM access, and customer support. Depositors may experience difficulties accessing their accounts or receiving timely assistance.
Banks often close branches as part of a merger to eliminate redundancy and reduce costs, which can lead to job cuts for both banks, potentially creating a negative impact on morale and productivity.
The acquiring bank will conduct a thorough review of the weak bank’s assets, including its bad loans, to assess their quality and potential for recovery.
The acquiring bank may engage in asset reconstruction or asset recovery measures to recover as much value as possible from the bad loans. This could involve restructuring the loans, selling them to asset reconstruction companies, or taking legal action against defaulters.
The acquiring bank will need to make adequate provisions for the bad loans and may also need to write off some of them if they are deemed uncollectible, bankers said.
Employees of Padma Bank, a bank that was bailed out by the government on quite a few occasions, expressed concern about their fate after the BB’s move to merge banks.
A number of depositors at National Bank said that they were concerned about its merger with another bank.
Md Main Uddin, who teaches banking at Dhaka University, explained that mergers should be economically rational, based on data on asset quality, profitability, liquidity, and capital.
‘If a strong bank sees benefits, it may proceed, and the merging bank will show interest, followed by financial and non-financial analyses,’ he said.
He emphasised finding accurate data on non-performing loans, controversial collateral valuation, and underrated asset riskiness affecting capital adequacy assessment.
Evaluating the target bank poses challenges, as an erroneous assessment can lead to the wrong merger decision.
If merger efforts fail, weak banks should be allowed to wind up minimising losses, ensuring clients receive their funds promptly, he said.
Speaking at a recent programme, economist Wahiduddin, who led two banking sector commissions in the past, said that proper examinations were needed to know the reasons behind lapses and deviations from standard international practice in the sensitive banking sector.
Otherwise, the recent BB move to merge weak banks with strong banks will backfire, he said.
He warned that responsibility for weak banks should not be given to public banks.
Speaking at the same programme on February 11, former BB governor Salehuddin termed the merger process ‘very difficult.’
Citing examples of other countries, he said that buying shares of weak banks is a way. But in that case, the strong banks would offer Tk 0.20 for a share of Tk 1.
New Age
