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Is merging ultimate remedy for our banking sector?

Published : Saturday, 24 February, 2024 at 12:00 AM  Count : 1711
Zia Uddin Mahmud
Recently central bank, even if it is late, has expressed their interest in squeezing the size of the banking sector of Bangladesh by way of merging. Presently, there are sixty one schedule banks are operating in Bangladesh and rendering services by their more than 11000 urban and rural branches throughout the country. Though, in last ten years both the size of annual national budget as well as GDP growth rate of Bangladesh has been seen incremental in each successive year than its previous year except in the period of COVID pandemic period but surprisingly these reflections has not seen in our banking sector.

Different problems like misappropriation of funds, Poor management, and uncontrollable loan default culture, corruption, money laundering etc. has made the sector in vulnerable position. Consequences of these some banks are suffering from different problems like failed to maintain minimum capital based on risk weighted assets (RWA), failed to maintain sufficient provisions against the classified loans, failed to maintain Cash reserve ratio (CRR). According to Bangladesh bank, the provisioning-fund deficit against bad assets in commercial banks increased to Tk19,300 crore by end of 2023, up from Tk11,000 crore recorded in 2022.

At the same time, defaulted loans surged up to Tk145,633 crore at the end of December 2023 from Tk120,656 crore at the end of December 2022. Bank has to maintain minimum capital based on RWA according to BASEL-III but all banks cannot maintaining the required capital, hence total collective capital shortfall was Tk 37,506 crore in the quarter that ended on September 30, 2023 that was surged up from Tk.33,744 crore in previous quarter.

To safeguard of the depositors money bank has to keep deposit a certain amount of total deposit to Bangladesh bank. Like all other indicators, the scenario of this indicator is not pleasant also. Total CRR shortfall stands at Tk.5193 crore in last November, 2023 which is very alarming. Though all the figures are created for weak performance of some specific banks but its a scenario of our overall banking sector. Some big sized banks are also suffering from those problems which are a cause of anxiety for the sector too.   

Now, so many questions may moves around you that how those problems are created? What is the source of those problems? What are the solutions to minimize those problems? What pushes the central bank to merging the financial institutions? Whether merging the banks is the ultimate solution to minimize the problems? May we face those problems again after merging?  

Merging of bank is an agreement between acquiring bank with one or more merged bank to combine their assets and liabilities and become a single entity. Merging is a common practice in worldwide. For the better interest of the depositors as well as to save a low performing bank from possible closure merging is a best practice. Recently, our neighboring country India, by way of merging has reduced total the number of public sector bank from 27 to 12. Recently, the governor of Bangladesh Bank in a meeting with the CEOs of schedule banks has expressed that out of 61 banks only 40 banks are performing well and rest 21 are weak and will be merged soon. Though it is late but this initiative of BB will help to bring the sector in order.

Though the controlling authority monitor the bank in every aspects but this aspect is not overseen by the controlling authority so far. I think this is an intrinsic part that is the root of all problems. So, controlling authority should formulate policy to ensure recruitment of efficient and eligible manpower who can work in an environment which is free from coerce, influence and biasness. On the otherhand, existing laws relating to recovery of loan needs to updated so that real recovery of money is effected in shortest possible time. Loopholes of the existing laws should find out and resolved so that willful defaulters cannot be escaped or judgment of court is not unnecessarily delayed.

While talking about merging an important question raised by the banker that why a good bank will acquire a weak bank? When a well performing bank will acquire a weak bank, the aggregate asset quality of the acquiring bank will deteriorate after merging. Thats why, formation of asset management company is mandatory who will buy classified assets of the merged bank. This will help the acquiring bank to perform well after merging and safeguard from possible deterioration of asset after merging.  

Another important issue must take in consideration. In an income statement of the bank total interest which is the main income of a bank, include interest both realized and unrealized. Unrealized interest mainly accrued in a loan that is unclassified but still unrealized. Bank allows dividend to the shareholder and pay corporate tax to the authority from this unrealized income too. If any portions of this unrealized income become classified after disbursement of dividend or payment of tax, ultimately it affect the entire balance sheet negatively. Not only this, bank keeps provision based on this income too. If this income is remain unrealized and become classified then provision kept will not be accurate. This type of practice is depleting the banks capital silently. So, bank should separate the unrealized income and it should not transfer to real income until actual realization.   

The vision of the bank should be sustainable growth so that asset quality remains good for long term. This is already proven that a short term unrealistic high profit making mentality will not bring good for the bank in the long run. However, to bring the financial sector in order effective mechanism should to introduce to minimize the existing problems, otherwise the merging of bank will not bring the fruitful result in future.

The writer is a banker and freelancer


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