Hurried mergers may prove counterproductive

We are concerned by the way in which Bangladesh Bank has decided to proceed with its plan for bank mergers and acquisitions. As we saw in the case of the planned merger of Shariah-based Exim Bank and struggling Padma Bank, a memorandum of understanding (MoU) was signed even before a detailed guideline on mergers and acquisitions was issued, whereas the sequence of events should have been the other way around. And even after the guideline was issued by BB, it is not being followed properly, according to a report by Prothom Alo. 

According to members of these banks, BB itself has directed which bank should merge with whom. During these meetings, the merger decisions were made in some cases in the presence of representatives of the two banks concerned, and in other cases, with representatives of only one bank. Some bank directors have even said that they had found out information about their own bank mergers from newspaper reports. Therefore, although the central bank has assured that mergers would be voluntary, it seems as if the reality is anything but that.

The World Bank had earlier warned that without careful assessment and prudent implementation of procedures to avoid weakening good banks as they acquire bad ones, rapidly implementing bank mergers may further undermine confidence in the sector. That is exactly what seems to be happening, with some bank employees expressing concern regarding the merger proceedings thus far. Moreover, experts have also mentioned the need to bring about systemic changes in the sector—such as regulators ensuring that habitual defaulters no longer get bank loans—without which bank mergers will not be beneficial. In fact, without such changes, good banks might also end up in difficulty.

Even though bank mergers, if properly carried out, would be beneficial, it seems Bangladesh Bank is proceeding with them too hastily. As a result, not everyone seems to be aware of what is going on, and banks are being made party to the mergers not of their own volition. Under the circumstances, BB needs to take a step back and discuss the matter openly with all stakeholders so that confusion and panic do not seep into the sector, further damaging it.