Merger of deficient banks ultimate fate

Merger of deficient banks could be their ultimate fate under a newly circulated prompt corrective action (PCA) framework, central bankers say as a consultation on major banking issues takes place today.
The Bangladesh Bank (BB) is set to discuss key issues, including the PCA framework for banks, at the bankers' meet, they said, as the banks are evidently navigating tough times.
And the consequences in failing to meet the compliance could be like possible merger or amalgamation of the underperforming banks-and these could also be shared in the meeting with the top executives of the country's commercial banks, sources at the BB said.
A team of the central bank led by its governor normally holds talks with the chief executive officer (CEO) and managing director (MD) of the banks periodically to discuss various key issues of banking sector and give suggestions from the regulator for sustainable banking operations.
Seeking anonymity, a BB official said various issues, including ongoing liquidity tightness, forex situation and PCA framework could be discussed in the meeting.
The central bank's banking regulation and policy department (BRPD) early December last year issued a circular on PCA framework by dividing the banks into four categories based on their respective financial health to diagnose ills early and before the problems turn acute, the official said.
"It is expected to be discussed in the meeting. We need to share the importance of the framework with the bank's top executives in detail so they can understand it properly," the central banker says.
Terming the PCA framework a pre-merger step, the BB official says the PCA framework categorises banks into four, from Category-1 to Category-4, each with specific actions stipulated.
There are opportunities too as the banks would be careful about improving the parameters. The banks failing to comply with the defined action framework, which will be effective from March 31, 2025 based on the annual audited financial statements for the period ending on December 31, 2024, may opt for merging with the stronger ones.
"So, we need to let them know that failure in complying with new standards will be treated as a weaker bank and may face merger in the next step," the official alerts.
Citing the recently amended Bank Company Act, the central banker mentions that the law has given enough authority to the BB to initiative forced merger and restructuring of weak banks.
As a spillover effect of the central bank's contractionary monetary stance to contain higher inflation, the banking sector, especially the unconventional banks, has been passing through a liquidity pressure and it could also be discussed at the meet, according to him.
Talking to the FE writer, chief executive officer and managing director of Dhaka Bank PLC Emranul Huq billed the PCA framework as very important, saying that the central bank had ordered them to discuss the circular with their board members as quickly as possible.
Following the instructions, they shared the matter with the board, informing them that the bank is well-placed in the category-1 in consideration of the parameters of the framework.
"It's a good move as the banks will be aware of the shortfall and promptly take corrective measures accordingly," says the experienced banker about the regulatory move.
The four parameters in the PCA are: Capital to Risk Assets Ratio or CRAR including 2.5 per cent CCB (Capital Conservation Buffer) (12.5 per cent), Tier-1 capital ratio (6 per cent), CET1 capital ratio (4.5 per cent) and Net NPL (net of interest suspense and actual provisions).
For example, under the CRAR between 10 and 12.5 per cent, banks will be treated as Category 1 while category 2 will have the CRAR between 8.0 per cent and less than 10 per cent, category 3 from 5.0 per cent to less than 8.0 per cent, and category 4 will be less than 5.0 per cent.
On the other hand, banks having the NPL ratio between 5.0 per cent and 8.0 per cent will be treated as category-1 while category 2 will have the NPL between 8.0 per cent and 11 per cent, category 3 from 11.0 per cent to 14.0 per cent, and category 4 will be over 14.0 per cent.

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