Banking sector mergers finally happening

That the country has too many banks relative to the size of the financial market is hardly any news. What is news is that the central bank (Bangladesh Bank) has finally stepped in to prod the weaker, tottering banks into mergers that will save some institutions from going down under. In line with that, Exim Bank has agreed to rescue beleaguered Padma Bank through a merger, the first in the country. While Exim is a publicly listed company, Padma is not. The former has a paid-up capital of Tk 14.45 billion and the bank it absorbs brings with it Tk 11.16 billion. The client base of both banks is similar in size, but Exim Bank (as of December 23) has outstanding loans of Tk 489.37 billion compared to Padma bank's (as of February 24) Tk 57.41 billion.
Bangladesh Bank (BB) has made it amply clear that mergers are not an optional affair and unless designated banks voluntarily merge, then BB will step in directly. While it is understandable that mergers have been designed to save troubled banks, it should not be treated as a 'silver bullet' to address everything that is wrong with the banking sector today. The rot that has set in the financial sector has been many years in the making. And to date, BB has tried and failed to rein in the nonperforming loans (NPLs) and not entirely without reason. It will be interesting to see precisely how the new merger will deal with the burden of bad loans, because that is omnipresent in both of these institutions. Apparently, that issue has not been worked out as yet. Once the framework for merger and acquisition (M&A) is unveiled by the central bank that issue will become clear.
It leaves the door wide for interpretation as to how the newly formed post-merger bank will address the bad-loan situation, what will be the regulatory interventions by BB to make this transition smooth so that the stronger bank isn't dragged down the drain by the weaker bank it absorbs. Bankers have stated off the record that too many 'ifs-and-buts' have been left out of merger process. For instance, a publicly listed bank is taking over a non-listed bank and the latter has been mired in controversy since its inception. Allegations of wholesale loan sanctioning defying set banking rules has dogged this bank since 2013. So, it remains to be seen whether the merger will actually save the institution or whether the parent bank will end up in trouble itself.
It is understandable that the government wishes to avoid any sort of collapse in the banking sector. But how it goes about rescuing the sector from decades of financial mismanagement is an issue that not only concerns BB, the ministry of finance, but the sector itself. One major issue that has largely been left unaddressed at policy level is why the rot was not stopped when it became abundantly clear that the amendment to banking rules a decade ago turned banks into family businesses. When rules were amended that allowed members of one family to have a controlling interest on the board of a bank that opened the floodgates of NPLs that took many functioning, profit-making banks to the edge of disaster. Unless those rules are changed, nothing much will happen to improve the financial health of the banking sector regardless of the efforts of the central bank.