Mergers to pass Tk84,000cr liabilities on to good banks. Taxpayers to foot the bill

The merger of 10 weak banks – a plan the Bangladesh Bank is pursuing to salvage the banks sinking under a huge burden of bad loans – will pass liabilities of at least Tk84,000 crore on to the good banks they will merge with while the taxpayers will bear the cost.

The 10 scam-hit banks have a total default loan of Tk54,000 crore as of December 2023 and capital shortfall of Tk30,000 crore caused by huge loan corruption.

This merger plan may help the Bangladesh Bank to bring down default loans to 5% from the existing 9% and clean the balance sheets of weak banks as per the ceiling set by the International Monetary Fund for 2026 as part of the condition for its $4.7 billion loan package.

But, this cleansing of balance sheets will come at the cost of taxpayers' money as banks will be provided policy support for merger through the purchase of bad assets by a state-backed asset management company and through liquidity support by printing money, which, experts fear, will fuel inflation further.

Taxpayers will ultimately foot the bill for any central bank intervention or government fiscal support for the recent announcement of mergers in the banking system, said Sabeth Siddique, former assistant director at Federal Reserve Bank, who has a long experience of working on mergers of American banks.

A strong independent supervision is also imperative to ensure taxpayers' representation in the process so that depositors' money remain insured, said Siddique, who also worked with various American banks.

When the central bank has to go for merger amid high default loan burden that has made a number of banks insolvent, it keeps offering new benefits to defaulters instead of taking action against them.

For instance, on 3 April, the Bangladesh Bank issued a circular, allowing banks to extend loans to companies associated with groups that have defaulted on loans until they are classified as wilful defaulters.

The central bank already provided the list of 10 banks to some good banks to choose which they want to merge with voluntarily. If they fail to do so by January, the Bangladesh Bank will go for forced merger.

The 10 banks are BASIC Bank, National Bank, Bangladesh Krishi Bank (BKB), Bangladesh Commerce Bank, ICB Islamic Bank, Rajshahi Krishi Unnayan Bank (RAKUB), AB Bank, Padma Bank, Janata Bank, and National Bank of Pakistan.

The total default loans in the banking sector stood at Tk1.42 lakh crore at the end of December last year; mergers of the 10 banks will reduce the amount to below Tk1 lakh crore.

Exim Bank has already announced merger with scam-hit Padma Bank. The Bangladesh Bank has also instructed a few other banks including City, Prime, Eastern, Dutch-Bangla, Sonali to choose a weak bank to merge with.

The Bangladesh Bank governor held a series of meetings with owners and top management of each of these banks about mergers, according to central bank sources.

Despite unwillingness, the banks are now evaluating the assets and liabilities of the 10 banks to select a suitable one for merger following the central bank's instruction, said a senior executive of a private bank.

Wishing anonymity, he said the banks will ask for compensation for taking over the liabilities so that they can sustain their existing performance after merger with weak banks.

He also expressed concern that though merger guidelines mention regulatory relaxation in capital maintenance and liquidity coverage, it will have negative results in the international market. In the domestic market, banks can operate with regulatory relaxation but international banks and rating agencies will rate the bank considering their indicators which will affect external business.

Sabeth Siddique, however, thinks credit ratings of the merged banks may not necessarily be negative as the prospective combined institution will show healthy quantitative and qualitative risk parameters in addition to the government support for the NPLs.

The Bangladesh Bank recently issued the merger guideline for the first time where it offered policy support so that performance indicators of good banks do not get negatively affected after merging with weak banks.

Under the guideline, bad assets of weak banks can be sold to the asset management company, which is under process of formation, backed by the government.

The draft Bangladesh Asset Management Company (BAMCO) Act 2020, prepared by the government, is proposed to be a state-run entity that will work under the Financial Institutions Division of the Ministry of Finance to purchase default or bad loans from banks or financial institutions and specialised banks and sell them off to individuals or corporate entities.

Moreover, the Bangladesh Bank will provide cash liquidity support on a priority basis through buying long-term bonds from the merged banks.

Zahid Hussain, former lead economist of the World Bank Dhaka office, said compensating banks for merger will eventually hit taxpayers.

He explained that if the asset management company purchases bad assets, it will come from the government budget as it would be a state-run company. So, ultimately the taxpayers will bear the cost.

If the support comes from the Bangladesh Bank, it will be printing money, which will also pass on to taxpayers as inflation tax.

He suggested share resolution as an alternative.

He said liabilities of those insolvent companies are higher than their assets, which means their net worth is negative. When a company makes profit, sponsor shareholders take the money, but if it incurs loss, they also should bear the loss.

In enforcing share resolution, either the owners of the weak banks have to bear the loss or the Bangladesh Bank can go hardline to recover money from defaulters who are already identified and well-known.

He said the central bank is going to clean the balance sheet through merger using taxpayer's money while it is offering benefits for defaulters by renewing the default cycle.