Two renowned economists have strongly recommended a merger in the local banking sector.
They are of the opinions that weak banks in both public and private sectors should be merged with good ones to lessen their operational costs and increase efficiency. The move if taken will reduce soaring non-performing loans (NPLs) in the banking sector and improve their asset quality, they have asserted.
Finance Minister AHM Mustafa Kamal on September 4 said the government might go for merging weak public sector banks if they failed to deliver services to people as per the requirement.
“If there is any failure in delivering services, we would then go for merger: failing ones with good banks,” Kamal had told reporters.
The comments of Kamal came after a recent merger move from the Indian government to streamline their public sector banks.
Currently, the country has 50 banks in the public and private sectors.
Ahsan H Mansur
Executive Director of Policy Research Institute (PRI)
In an exclusive interview with Dhaka Tribune, Executive Director of Policy Research Institute (PRI), Dr Ahsan H Mansur has said the necessity of a merger comes as the number of weak banks in the sector keeps increasing.
"Merging in the banking sector is necessary as there are a number of weak banks that cannot run their financial operations smoothly, mainly due to the soaring bad loans and loss of capital. Those banks lost economic grounds to operate independently in future. Their assets need to be merged with strong banks," Dr Mansur says.
"A merger can bring cost effectiveness, meaning branches of multiple state-owned banks (SoBs) like Sonali, Rupali, Agrani, Janata will not remain in the same place/location. There will be one or two branches at a certain location to deliver services. It will reduce cost of conducting business," Mansur thinks.
He says merger is better than liquidation.
"If liquidation takes place, defaulted borrowers may flee or hide to avoid responsibility. But, when two banks merge, the reinvigorated bank management can net the defaulters to realize their outstanding loans," he elaborates.
Dr Mansur mentions that number of banks in the country increased unnecessarily.
"Too many banks in Bangladesh are not necessary. For Bangladesh Bank, it is not possible to nourish so many banks. As a result, various malpractices took place centring many public and private sector banks,” he points out.
He maintains: "In Bangladesh, getting high quality managers or executives for banks is often elusive. This scarcity drives bank owners to recruit low and inferior quality of people at the top tiers to their banks to run the operation."
He suggests formation of a committee to recommend mergers in the banking sector.
The economist, however, says banks' merger will have an abrupt fallout in unemployment.
"This may be addressed by the initiative of providing skills-development trainings to young career bankers while older ones face handshake retirement."
Zahid Hussain
Former lead economist, World Bank
Former World Bank (WB) lead economist Zahid Hussain thinks that mergers in the banking sector becomes necessary when excess competition prevails as he finds the number of weak banks increasing with shortage of skilled manpower, and rise in bad loans.
"In our banking sector, a situation is prevailing now for merger as the number of state-owned banks, weak banks, and new private banks is on the rise. So, there is a necessity for consolidation and merger," he says.
He believes that merger will create unification of assets and deposits and ultimately raise operational strength of banks with reducing their operational costs.
"Merger or unification in our country does not take place naturally. We merged banks before and after independence," he notes.
The noted economist says state-owned banks (SoBs) deliver social services on behalf of the government but there should not be too many of them.
"Overlapping branches of state-owned banks must be avoided in a particular location. A branch of a single SoB can also be assigned to cater to a particular locality and population,” he suggests.
He mentions that some private banking companies have already turned weak, needing to be merged with better ones immediately.
"More importantly, one or two fourth generation banks already accumulated huge bad loans in a very short time, as they were not licensed to meet requirements, but given banking permission on political consideration," he points out.
Hussain maintains that a weak banking company cannot produce new products to offer and attract clients and face ill fate as a consequence.
He says people will not trust banks with bad reputations.
"When such a weak bank will be taken over by a stronger bank, the intermediation would be stronger under the new management. When this would happen in big volumes, the wheel of the economy would cycle with more frequency," Hussain maintains.
"Merger of banks is a fair practice in developed economies. It is intended for the welfare of both the banks," he adds.
Hussain suggests a long-term policy for execution of merger of banking companies.
"Merger will not happen overnight. It will be a step by step process under a long-term policy. Before the merger, messages are needed to be sent to selected banks that either they must improve their capital status and operational skills or face consolidation," he says.
He suggests that a last chance can be extended for the weak ones for improvement, but not repeated extension should be allowed for their development.
NPL status at SoBs
The stake of six state-own banks (SoBs) totalled to Tk54,081 crore out of the banking sector's gross non-performing loans (NPL) of Tk1,12,000 crore as of June 30, 2019, according to Bangladesh Bank data.
Janata Bank tops the chart with Tk21,410 crore or 40% of its total investment as NPL. The bank's NPL was Tk8,000 crore in June the previous year. Its bad loans rose by Tk13,500 crore over a span of one year.
Sonali Bank's NPL came down slightly to Tk12,400 crore in June this year from Tk12,475 crore one year ago. In percentage, the bank's NPL declined to 25.55% from 33.27% in a year.
Agrani Bank's NPL rose to Tk6,147 crore in June this year from Tk5,678 crore previous year. In percentage, the bank's bad loans remain the same (17%) due to rise of investment.
Rupali Bank's NPL status improved slightly. In June this year, the bank's NPL slid to Tk4,380 crore from Tk4,916 crore a year ago. In percentage, the bank's NPL status decreased to 17.44% from 21.33% within a year.
Basic Bank's NPL increased in June this year compared to the previous year. Its NPL rose to Tk8,843 crore in June. The bank's NPL was 57.41% of its total investment.
At Bangladesh Development Bank Limited, gross NPL was Tk901 crore in June this year, up from Tk805 crore a year ago. In percentage change, NPL rose to 54% in June 2019 from 46% in the same month previous year.
Merger of banks in India
On August 30, Indian Finance Minister Nirmala Sitharaman announced a slew of banking reform measures, including the merger of 10 public sector banks into four entities. This would take the number of banks in the country from 27 in 2017 to 12 after execution of the announcement.
Sitharaman said the move was part of her government’s efforts to revive the economy that had been experiencing a slow growth.
