Bank mergers: lessons for a sucker in despair

Only a few days or weeks before the Bangladesh Bank (BB) issued the April 4, 2024 circular, introducing guidelines for both voluntary and compulsory mergers, the Chairman of the ailing Padma Bank, M. Nafeez Sarafat resigned. Under a new Acting Vice Chairman, Afzal Karim, Padma Bank signed an MOU with Exim Bank in March 2024. Thus, the Prime Minister’s plan, announced in Parliament on February 7, 2024, “to merge the struggling Padma Bank with another banking institution to protect its customers and stabilise the financial sector” was on its way to get realised. Even if one ignores the legal issues raised in various platforms, one remains unclear as to how depositors’ interests will be protected and how the so-called ‘merger’ will help stabilise the financial sector! This paper provides a narrative to suggest that the merger-actions with initial targets may serve interests of the very ‘groups’ whose greedy pursuits had caused the pathetic state. There is, however, a need to filter out the wrong-doers and reduce the number of banks with strong state-intervention, going beyond a narrow concept of ‘merger’.
Unbundling the Semantics: Merger, amalgamation and acquisition are the three key terms used, individually or in combination, to describe the process that the BB initiated. Surprisingly, there is no mention of liquidation, an option that could have been an obvious choice under bankruptcy! Furthermore, ‘bailout’ is only marginally mentioned, in spite of its importance in realising the so-called merger.
Of the first three, acquisition refers to takeover (purchase) of one entity by another, whereby ownership of asset and liability of the acquired entity will lie with the acquirer. The BB guideline mentions of acquisition in passing only – while stating that the guideline “will also apply to cases of reconstruction under a compromise or arrangement reached with another bank or financial institution for acquisition of certain branches ...”. The stated focus of the guideline remains on amalgamation/merger, often interchangeably used with ‘reconstruction’ – and not with acquisition! Various sources in the net suggest that a “merger is a business deal where two existing, independent companies combine to form a new, singular legal entity”. Those sources also suggest that mergers are voluntary (See, forage.com and mca.gov.in).
Discussion on ‘amalgamation’ surfaces less frequently in public exchanges, compared to references one finds on merger & acquisitions (M&A). Yet, it has a legal definition, in relation to companies. As stated in the Bangladesh Income Tax Ordinance, 1984, amalgamation means “the merger of one or more companies with another company, or the merger of two or more companies to form one company ... in such a manner that ... all property and liabilities of the amalgamating company or companies immediately before the merger becomes the property of the amalgamated company”.
In summary, one may think ‘amalgamation’ to be a broad term that has merger as a special case, and ‘acquisition’ as a case of merger where the acquired (bought) entity is merged with the acquiring (buying) entity. Thus, merger would be viewed as “a consolidation process wherein the resultant company may be a new or (an) existing company”. And, acquisition would be a merger where an existing company, the one acquiring other entities, would retain its identity as the owner of the acquired entities.
The above-mentioned three terms generally refer to market-induced actions involving two or more legal entities, and public actions are normally called to counter those to curtail concentration of market power in fewer hands. In contrast, liquidation is a “process of permanently closing a bank and its branches, selling off any assets and using the proceeds to settle as many of the bank’s remaining liabilities as possible”. It appears to be the only ‘sensible’ option for banks recording negative net wealth. The company laws in Bangladesh appear to be ambiguous with regard to who may initiate the process. One would think, if a ‘compulsory’ merger is within legal bounds, a compulsory liquidation should be legally more acceptable, especially when public (depositors’) interest is at jeopardy!
Strictly speaking, bailout is an independent action taken by a government or a (multilateral) lending agency that involves, “payments (including loans, loan guarantees, cash, and other types of consideration) made to a liquidity-constrained private agent in order to enable the latter to pay its creditors and counterparties, when the agent is not entitled to those payments under a statutory scheme.” Often, bailout is justified on ground of supporting an industry that may be affecting millions of people, particularly when a market entity fails because of factors beyond the control of the owners/management of that entity. In cases of Bangladesh’s ailing banks, including Padma bank, the causes are the bad loans that are alleged to have arisen due to connivance among large borrowers (willing defaulters), bank management controlled by a few greedy shareholder-owners, a segment of the regulatory authority — and all under the patronage of a segment in the power. Needless to say, depletion of bank assets often forces a government to rely more on external borrowing which expands the business of multilateral lending agencies, and yet, the books of the commercial banks need to be made cleaner to allow future inflow of loans. With no serious effort to correct the system by bringing the wrongdoers to justice, ‘bailout’ (or, subsidies) in future to cover-up discrepancies in books with funds from external borrowings, may explain why the World Bank had insisted on bank mergers back in 2019! (See, Finance Minister’s remarks quoted in FE, March 11, 2019).
In the light of the above, legal formulations, as evident in case of the BB’s April document, appear ambiguous. Such ambiguities are possibly pursued purposefully in order to ensure some degrees of freedom, and (at times) to push through hidden agenda. Inclusion of amalgamation, merger and reconstruction in a single title, and uncalled for inclusion of ‘compulsory merger’ allows much flexibility in the legal space. It also appears that partial acquisition (of a select few branches) cannot be ruled out, as is the possibility of bailout, even though these largely remain unaddressed in public exchanges! Most importantly, the obvious choice of ‘liquidation’ has been completely removed from the discourse!
Concluding observations: In a separate paper, the author undertakes a critical review of the various rationale proposed to justify the BB’s April 4 move. Some of the suggestions mentioned below are reasoned out there.
n It is commonly recognised that fractional banking enabled exchanges to expand and new markets to emerge. More importantly, it provided a potential vehicle for channelling fund from small depositors to investors and thereby expand the economy. However, following the western route of converting those into limited companies made ownership fungible and enforcing compliance got increasingly difficult. Deviating from single country citizenship, as enunciated in the constitution, helped the con-game to flourish further. It is important to recognise the susceptibility and vulnerability of the banking system to con game, and the onus lies on the regulatory authority to take appropriate measures to protect the system urgently.
n Everyone agrees that fewer banks could provide the same level of service in the pre-digital (but digitised) banking system. With further digitalisation, demand for banks will decrease further. The route of so-called merger is not well-conceptualised and the legal holes may provide escape routes to the wrong-doers. More importantly, BB may reconsider the merger procedure and take the route of liquidating failing banks so that the books are transparently closed and all obligations are met before the books get buried in the accounts of acquiring bank.
n Recently, proposal has been placed to provide insurance on deposits up to Tk 0.2 million. Further increases may be considered in order to bring people’s trust on banking system. However, it is important that the premium remains the responsibility of the banks (A Kibria on protecting depositors’ money, FE, March 11, 2020) and the cost is not passed onto depositors.
n Bangladesh has a long history of channelling resources to pre-selected business houses, with liability shown against state-owned bank (SOB) accounts, that are closed with fund sourced from taxes (including VAT and customs duty), inflationary tax (arising from printing money) and by taxing the future generation with present borrowing. This had also created spaces for conning whereby toxic financial products generated elsewhere could be dumped into the SOB’s! While government’s separate window to engage in the banking sector cannot be ignored, it is important for a state to ensure that the SOBs are not made into dumping grounds for toxic financial products. Accordingly, without having to dismantle the Banking Division, regular banking practices of SOBs may be made to follow the usual due diligence under the BB.
n It is important to recognise that the multilateral agencies are essentially lending agencies who are keen on recycling the surplus generated in one part of the world to countries which are willing to pay relatively high returns. There can be no doubt that the developing world need additional funds to progress. It is also natural to find unholy alliance between global lenders and representatives in borrowing countries with no accountability and who are keen on transferring those borrowed funds to more developed countries. Unfortunately, efforts to understand the processes and develop alternative strategies, in the interest of the borrowing countries, have not been forthcoming. BB needs to develop its own research team, who can connect with central banks of countries faced with similar problems, and work towards developing own agenda independent of the consultants from the lending community.
n It needs emphasising that success of BB’s merger-move depends on (i) whether and how the defaulters are made to pay, (ii) how the accounts of acquired banks are closed (ideally, liquidation procedure should be followed), and (iii) how the depositors are assured of their savings WITHOUT hassle.
Dr Sajjad Zohir is Executive Director, Economic Research Group (ERG). Views expressed in this paper are exclusively author’s own, and do not necessarily represent the views of other members of ERG. [email protected]