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Should BB follow RBI’s lead and merge weak banks with sound ones?

  • Published at 01:11 am November 26th, 2020
Bangladesh Bank BB head office HQ
Mehedi Hasan/Dhaka Tribune

Last week, the Reserve Bank of India proposed the merger of capital-starved 94-year-old Lakshmi Vilas Bank with the Indian arm of Singapore’s DBS Bank

Earlier on November 17, the Reserve Bank of India proposed the merger of capital-starved 94-year-old Lakshmi Vilas Bank with the Indian arm of Singapore’s DBS Bank, which its cabinet yesterday agreed to.

This raises the question: should such an exercise take place across the border, where there is no shortage of troubled and weak banks?

“We don’t need so many banks in our economy,” said Ahsan H Mansur, executive director of the Policy Research Institute.

At present, 60 banks are in operation and the window for getting a new licence is not firmly shut.

Earlier in February, the Bengal Commercial Bank got the licence from the Bangladesh Bank, and two more -- People’s Bank and Citizen Bank -- are waiting in the wings for their golden ticket. 

“The number of banks is high given the size of the economy and the excess number of banks will make them grocery stores soon,” said Khondkar Ibrahim Khaled, a former deputy governor of the BB.

There are many small and weak banks in Bangladesh and those should be merged like in India, Mansur said.

Small and weak banks should be merged with the financially strong bank.

“Otherwise, the situation would not improve,” said Mansur, a former economist of the International Monetary Fund. 

But in Bangladesh, it is hard to gauge the health of a lender seeing that the reporting on the banks’ financials is also not done properly, said Mansur, also the chairman of Brac Bank.

As of June, ten banks including six state-run ones jointly faced a total capital shortfall of Tk 21,317.2 crore, according to data from the BB.

The banks are Agrani, Rupali, BASIC, Janata, Bangladesh Krishi Bank (BKB), Rajshahi Krishi Unnayan Bank (RAKUB), Bangladesh Commerce, Community Bank Bangladesh, ICB Islamic and Padma. 

The state-run specialised lenders BKB and RAKUB have negative capital adequacy ratio (CAR), which is a measurement of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. 

The CAR, also known as capital-to-risk weighted assets ratio (CRAR), is used to protect depositors and promote the stability and efficiency of financial systems around the world. 

Bangladesh’s banking sector has maintained the lowest capital adequacy ratio (CAR) among its South Asian counterparts, according to the BB’s Financial Stability Report 2019.

AB Mirza Azizul Islam, a former finance adviser to a caretaker government, echoed the same as Mansur.

“There is absolutely no need for so many banks in our economy. In fact, given the state of a number of banks, they should be forced to merge.”

The government has no will to merge the failed banks because of pressure from influential groups, he added.

“Banks in Bangladesh will never merge willingly even if they fail to run their business,” Khaled said.

In some countries, a bank can merge with another bank if both the banks want to amalgamate and, in some countries, the central bank has the power to merge the weak and small banks. 

About 72 per cent bankers are in favour of bringing down the number of banks through merger and acquisition, particularly the weak ones, according to a survey of the Bangladesh Institute of Bank Management (BIBM).

At present, the BB does not have the authority to force a merger like the RBI.

But recently, the central bank in a draft bill sought amendments to the Bank Company Act 1991 and spelt out its plans for ‘structuring’, ‘merger’ or ‘liquidation’ of the bank companies in trouble.

A permanent body would be established at the BB to deal with troubled and weak banks, as per the bill. 

The draft bill of amendments to the Bank Company Act 1991, which was put up on the finance ministry’s website, is yet to get the green light. 

“If the draft bill is passed, the central bank will be able to merge any weak and troubled bank if it wishes,” said a high official of the BB directly involved in the drafting the bill. 

At a programme on September 20, Prime Minister Sheikh Hasina on September 20 hinted that the banks that are not functioning properly would be merged following proper assessment. 

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