The Bangladesh Bank (BB) has recently introduced a pioneering policy , marking its debut in formalizing the process of bank mergers, offering clear guidelines on the anticipated outcomes.
The full guideline, BRPD Circular No. 08 dated 04.04.2024, is available here.
Per the directive from the central bank, commercial banks found to be in a precarious financial position or exhibiting signs of distress will be subject to mandatory consolidation if they fail to initiate merger discussions independently. Prior to formalizing any merger, the concerned banks are required to execute a mutual agreement.
Subsequently, financial institutions are obligated to furnish a comprehensive repayment scheme addressing the interests of all stakeholders including depositors, creditors, and investors.
Following these initial steps, an exhaustive evaluation of the financial health of the involved banks will be conducted by external auditors under the purview of the central bank. Subsequently, formal application for merger approval must be submitted.
In adherence to the policy, directors, managing directors, and deputy managing directors of the financially weak banks will be ineligible to hold their respective positions for a period of five years post-merger.
However, provided the board of directors of the merged entity deems them suitable, aforementioned officials may be reinstated to their former roles or appointed to alternate positions following a review of their contracts.
Furthermore, it is stipulated that no employees of the weak banks shall face termination within a span of three years following the merger.
To ensure seamless operations and safeguard the stability of the banking sector, the central bank pledges to extend policy assistance to merged entities as deemed necessary.
These measures encompass temporary exemptions from obligations such as maintaining minimum capital conservation, cash reserve ratio, statutory liquidity ratio, liquidity coverage ratio, and net stable funding ratio for a specified duration.
In instances where a financially distressed bank merges with another, there may be a dilution in the financial indicators of the acquiring bank including capital adequacy, liquidity, and non-performing loans.
A grace period will be afforded to offset the total losses incurred by the weak bank against the earnings of the acquiring bank or to convert them into “goodwill”.
Moreover, liquidity facilities will be expedited to merged entities on a priority basis utilizing existing facilities. The central bank will extend financial assistance to merged banks through the purchase of long-term bonds.
Support will also be extended to unified banks in raising capital through the issuance of shares, perpetual bonds, and subordinated bonds.
Thursday’s circular underscores that bank mergers necessitate approval and mediation by the central bank. Notably, in line with the expanded authority vested in the Bangladesh Bank concerning prompt corrective measures as per the amended Bank Companies Act, a Prompt Corrective Action (“PCA”) Framework circular was issued on 5 December 2023.
Under this framework, banks falling short in capital and liquidity, defaulting on loans, exhibiting governance deficiencies, or engaging in activities detrimental to depositors will be subject to compliance with recovery measures mandated by the central bank. Failure to adhere to the prescribed recovery plan may culminate in the compulsory merger of the bank in the best interests of depositors.
The issuance of this policy by the Bangladesh Bank aims to streamline the merger process for commercial banks, ensuring an orderly transition.
This development reflects an increasing focus at the policy level on the merger of weak banks and financial institutions, following the Bangladesh Bank’s unveiling of a roadmap aimed at rescuing vulnerable financial entities through strategic consolidation.