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Dhaka Tribune

Will panicked withdrawals, banks' unwillingness make BB rethink the forced mergers?

The recent surge in fund withdrawals from Basic Bank and National Bank is further complicating matters for these struggling institutions

Update : 25 Apr 2024, 06:04 PM

Over the last few weeks, there have been long queues for cash withdrawal at soon to be merged banks, which economists say should make the central bank rethink its decision on forced mergers, as cash strapped banks are now further under liquidity pressure.

The central bank has already announced the merger of five banks, retracting from its earlier plan to merge 10 banks. The recent surge in fund withdrawals from Basic Bank and National Bank is further complicating matters for these struggling institutions.

Last week, depositors swarmed branches of the two banks following reports of Basic Bank merging with City Bank and National Bank with UCBL. Similarly, the state-owned Bangladesh Development Bank Limited (BDBL), set for merger with Sonali Bank, and Rajshahi Krishi Unnayan Bank (Rakub), to merge with Krishi Bank, are also grappling with pressure from drastic withdrawals.

However, some speculate that the timing, coinciding with Ramadan and Eid ul Fitr, may also be a contributing factor.

Seeking anonymity, a bank manager told Dhaka Tribune that while the demand for cash withdrawal has increased, the timing of it is such that they cannot be sure if it’s out of merger panic or for Eid.

If the withdrawal pressure continues after Eid, it must be understood that it is the effect of the merger, the manager also added.

In an attempt to quell rumors, the central bank in a statement on Tuesday said that individual and institutional depositors' money will remain completely safe and secure in banks, processes in which are to be merged.

The account holders of two merging banks will be able to maintain their respective accounts as before even after the completion of the merger, the central bank also said in the statement sent to the media.

Moreover, the merger process will be completed with the consent of the sponsor directors, current board of directors and the general shareholders of the banks, it said.

Tuesday's statement aimed at dispelling misinformation, as the Bangladesh Bank believed various types of news regarding bank mergers have been published in various electronic, print and social media, which in many cases are not based on factual information.

Do these banks want to merge?

On April 18, the management of the state-run Basic Bank wrote to the Finance Ministry's Financial Institution Division, seeking assistance on how to deal with the problem.

Officials said around Tk2,000 crore was withdrawn from the bank in a few days last week.

Abu Md Mofazzal, acting managing director of Basic Bank, said different government entities chose his bank to deposit money because it was a state-run institution.

The government bodies are now withdrawing their funds because the bank is merging with City Bank, which is a private bank, he added.

Mashrur Arefin, managing director of the City Bank, said people often do not like changes.

He also stated that if the two balance sheets are merged following the restructuring of the weak bank, all concerns will be alleviated.

National Bank is also struggling to keep up with the horde of clients waiting to withdraw their money.

Regarding these panic withdrawals Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh (PRI) said: "Depositors at both weak and strong banks are expected to see a rush to withdraw money.

To stop this, the central bank and the government must ensure that depositors do not lose their funds, economists also added.

What went wrong

Another emerging question is whether Bangladesh Bank has violated its merger policy.

The central bank introduced a merger policy stipulating that banks intending to merge voluntarily must make independent decisions within their respective boards of directors by December of this year.

According to the "Compulsory Mergers-Related Policy," Bangladesh Bank will have the authority to forcibly merge weak banks starting from 2025.

The central bank will bear the costs of evaluation. Upon making the merger decision, a notice detailing the responsibilities and asset acquisitions of the relevant bank must be published in newspapers to ensure transparency.

The central bank retains the authority to merge the bank with any other institution.

Mentioning that hasty and forced mergers are the new face of continued impunity in the banking sector, Transparency International Bangladesh (TIB) on Tuesday urged for halting the implementation of decisions.

“The central bank has initiated steps to merge underperforming banks with stronger counterparts to save weak banks in the sector, which is supposed to be considered as being in line with global practices related to tackling the crisis in the financial sector,” said TIB in a statement.

“The arbitrary announcement of certain bank mergers, coupled with concerns among well-performing banks involved in the process and the unwillingness of some underperforming banks, has worsened anxiety, unrest, and uncertainty within the banking sector.”

TIB believes that such instances have cast doubts over the entire process even before it started.

The anti-corruption organization asserts that the lack of transparency in the bank merger process, particularly concerning the management of default loans and issues of accountability within weak banks burdened by default loans, essentially sidesteps the main problem of the crisis and gives impunity to the factions responsible for loan defaults and forgery.

Dr Toufic Ahmad Choudhury, former director general of the Bangladesh Institute of Bank Management (BIBM), expressed concern, stating: "The way Bangladesh Bank is proceeding, it doesn't resemble a true merger process; it's more of a forced decision. A merger should be voluntary, but the opposite is occurring.

“Consequently, there's skepticism regarding the successful execution of the merger initiative." Although an ‘exit policy’ was outlined during the licensing of banks, it has yet to be implemented. Consequently, many of these banks have become financially weak.”

Dr Choudhury further highlighted another issue arising from the merger initiative, stating that weak banks' bad assets will be sold to third-party companies without clarity on the asset acquisition process outlined in the policy.

This implies that these loans will be purchased using government funds, effectively granting defaulters immunity instead of facing consequences for their actions. This exacerbates an already challenging situation, further benefiting those responsible for the banks' deteriorating conditions.

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