Banking sector may face mergers and acquisitions after the pandemic

In Bangladesh, the concept of Mergers and Acquisitions (M&A) deals is relatively new but it is common in other parts of the world. 

Theoretically, mergers and acquisitions (M&A) are defined as consolidation of companies. While mergers refer to the act of combining two companies to form one, acquisitions is the process by which one company is taken over by the other. 

M&A is one of the major aspects of the corporate finance world. The reason behind M&A is that two separate companies together create more value compared to one. With the objective of wealth maximisation, companies keep evaluating different opportunities through the route of merger or acquisition.

In recent times, we have noticed a few large acquisitions in Bangladesh. 

For example, CEMEX Cement Bangladesh was acquired by Siam City Cement of Thailand, the local Philips and Pepsi businesses were acquired by Transcom, significant shares of City Cell were acquired by SingTel, and AKTEL shares by NTT DoCoMo. Bangladeshi banks did not experience M&A, but the need for such thinking cannot be overruled considering the near future. 

As we know, the global pandemic has caused serious damage to the economy of Bangladesh.  The participation of the banking sector as a catalyst to overcoming the crisis, reviving stagnant economic activities and transferring liquidity to the people who do not have any income now has become vital. 

By this time, the prime minister has announced an incentive of around Tk 1 lakh crore and the major responsibility of implementing the financial incentive has been on the banks and financial institutions and as such they have already started working in accordance with the instructions of the central bank. 

Some of the ongoing and forthcoming challenges of the banking sector: 

a)    The banking sector has been overburdened with the classified loans for long. According to Bangladesh Bank, Tk 9 lac 69 thousand and 62 crore has been disbursed as loan from the banking sector till September 2019. Of this, 1 lakh 18 thousand 26 crore taka has defaulted, which is 11.99 percent of the total disbursed loan. According to IMF, as of June 2019, the total amount of problem assets in the banking sector stands at a staggering Tk 2 Lac 40 thousand 1 hundred and 67 Crore, which is really alarming. When defaulted loans increase, capital deficit naturally increases. 

b)    Some of the banks are facing the problems of capital shortfall. At the end of September 2019, 12 banks had a capital deficit of Tk16 thousand 60 crore. Besides, the incremental rise in classified loans is adding more pressure on the banks over the time and if the situation prevails, some of them will barely survive. BASIC Bank Limited and Padma Bank Limited have somehow managed to survive under special protection from the government, otherwise they would not have been in existence. 

c)    The bank management faces unwanted interference of the board with regards to sanctioning of loans, selecting clients, recruiting employees, purchasing material assets and in almost every major operational issue of the banks. Sometimes this sort of unwarranted practice propagates unfavourable working environments and induces loans to get classified later. The lack of good governance and presence of inefficiency in running the operations is holding back the banks - both in public and private sectors. 

d)    Recently the government has fixed the interest rate on banks at 9 percent from April this year. Meanwhile, banks have been asked to suspend interest rates for two months to reduce losses of businesses during the pandemic. The ABB has calculated that because of the suspension of interest for two months and re-fixation of interest to 9 percent, the banking sector will lose around Tk15,000 crores this year. And the government will also be deprived of tax revenue of around Tk750 crore. With that, since businesses are mostly closed, banks will not be able to earn commission income. In this situation, bankers think that small banks will lose an average of Tk20/25 crore and the big ones will lose about Tk150 to 200 crores this year.

e)    The banks have a new challenge to meet following the Covid-19 pandemic as the major implementation of the government stimulus will be done by the banks. This may put the banks under extra pressure of loan defaults as some clients have a habitual propensity to default on loans, especially since it is from the government package. The banks have called for a Loan Risk Guarantee Scheme from the state, but no clear decision has been made by the government. There are many pros and cons to this but the main thing is that the risk of the bank remains. Moreover, now there will be no new debt collection resulting in more effect on the income of the bank. All in all, the problem in the banking sector will be more obvious. Due to corona, there is no scope to take any action against the defaulters.

f)    The banking sector was in turmoil even before the coronavirus pandemic hit the country. The bank's deposit has been declining for a long time, it will drop further as now no one is going to keep money in the bank but is going to withdraw instead. All in all, the banking sector is likely to face a kind of liquidity crisis in the near future, though not now, because money flow has increased in the market now following the monetary policy concessions of the central bank. Now the deposit growth is negative from the small depositor's side. 

Some recommendations for sustainability

a)    Bangladesh Bank in consultation with the government can take aggressive punitive measures against the intentional default customers and recover the banks' money. Passport cancellation of  defaulters can be an exemplary punishment if they do not pay back the loan.

b)    During this pandemic it is necessary to pay careful attention to the flow of money, the recovery of defaulted loans and taking proper guards so that new loans do not become defaulted. 

c)    Banks need to reduce their operating costs by at least 40 percent. In particular, the salaries of top officials, including CEOs, should be reduced by 50 per cent during these emergencies. Staff layoffs will be unbearable for the economy.

d)    Existing good clients can be a priority in giving the loans under the government's stimulus package and then some steps can be overlapped while sanctioning so the process is accelerated and expedited. Side by side, new customers can be addressed so that money flow into business starts fast.

e)    A commission can be formed to suggest policies with regards to lessening the classification, defining classification as per global standards, ensuring corporate governance, efficiency, inclusiveness and holding the banking sector to international standards, and meeting the criteria of SDGs.

f)    Single borrower credit limit should be re-fixed to a lower level to lessen the risk. 

Moreover, the government should think of going for or allowing Mergers and Acquisitions (M&A) for bringing efficacy and efficiency in the banking sector where needed. Everything has to be done quickly, it will be difficult to have a strong banking sector if it is too late.  

The author is an Economics Analyst, Founder and CEO of Finpower Leadership International