Padma Bank signs MoU with Exim Bank on merger, process may take ‘3 to 6 months’

Padma Bank, which has long struggled with bad loans, will merge with the Shariah-based Exim Bank

Padma Bank, which has long struggled with bad loans, has signed a Memorandum of Understanding, or MoU, for a merger with the Shariah-based Exim Bank.

The entire process of the merger may take three to six months to complete. After the merger, Padma Bank will no longer exist and the bank will continue to operate under the name Exim Bank. All of Padma Bank’s customers will be transferred to the new Exim Bank as well.

Exim Bank has promised initially that no officers at Padma Bank will lose their jobs as a result of the merger, but no directors at Padma can hold the position of director at Exim.

The MoU was signed by Padma Bank Managing Director Tarek Reaz Khan and Exim Bank Managing Director Mohammad Feroz Hossain in the presence of Bangladesh Bank Governor Abdur Rouf Talukder on Monday.

Exim Bank's chairman, Nazrul Islam Mazumder, told bdnews24.com, "Exim Bank is taking over Padma Bank. We have come together for a merger, not an acquisition. Exim Bank will pay off Padma Bank's liabilities."

Afzal Karim, the chairman of Padma Bank and managing director of Sonali Bank, said the merger will take three to six months to complete.

According to Bangladesh Bank spokesperson and Executive Director Mezbaul Haque, the bank will undergo an audit once the merger is complete, following the Office of the Stock Exchange and Registrar (RJSC) guidelines.

"They will have to get the approval of the Bangladesh Bank to start banking operations anew," he added.

CONTEXT OF THE MERGER

Padma was founded as The Farmers Bank after former home minister Muhiuddin Khan Alamgir, along with several others, secured the licence in 2013.

Its leadership and the name were changed after most of the loans disbursed by the bank became non-performing within a few years of its inception.

In 2019, the government injected Tk 7.29 billion in capital into the bank through the Investment Corporation of Bangladesh and state-owned banks as a last-ditch effort.

However, the bank was not handed over to new management. No investment was received despite the bank's announcement of bringing in funding from abroad.

Until 2021, the Padma Bank accumulated losses exceeding Tk 9 billion.

However, in the four years following the change of its name, Padma Bank lost over Tk 2.46 billion from the new capital.

Despite having deposits of Tk 61.41 billion, the bank disbursed loans above Tk 55 billion until last September. Of this, 64 percent of the loans defaulted.

On Jan 31, Padma Bank's chairman, Chowdhury Nafeez Sarafat, stepped down, and Sonali Bank's managing director, Afzal Karim, was made the new chairman.

In February, Prime Minister Sheikh Hasina stated that the banks that are not performing well would have to merge with other banks. The head of the government also gave her approval on the issue of Padma Bank during that time.

On Mar 14, Exim Bank announced that its board of directors had decided to take over Padma Bank with the central bank's approval. Beleaguered Padma Bank also stated its decision to merge with Exim Bank on the same day.

Price-sensitive information about the merger was published on the websites of the Dhaka Stock Exchange and Chattogram Stock Exchange on Monday.

The two banks also signed the MoU on the same day.

WHAT'S NEXT?

Over the years, more than a dozen banks have been struggling to stay afloat due to ongoing issues with defaulted loans and scams.

As these banks have become liabilities to the entire banking sector, mergers or consolidations have become a key part of discussions over financial sector reforms.

The Bangladesh Bank had previously stated that it wanted to merge beleaguered banks with well-performing ones.

As a result, the banks are undergoing the Prompt Corrective Action or PCA process within the span of a year.

This has helped resolve the banking sector's persistent issues of defaulted loan rates, capital adequacy, cash flow and risk-based assets.

Meanwhile, Bangladesh Bank has added the names of ten banks to a list, underscoring them as 'weak' based on their performance.

As its last attempt to remove the 'weak' banks from the banking sector, the central bank has approved the decision to merge these banks to shore up the financial sector of Bangladesh—starting with Padma Bank.

If the proposal for the merger is approved, the two banks will be audited by a third party. After finalising the accounts of liabilities and shares, the Bangladesh Bank will approve the merger and Padma Bank will cease to exist. Until then, the two banks will continue their operations separately.

According to Exim Bank Chairman Nazrul Islam Mazumder, Exim Bank will be responsible for all the Padma Bank customers after the merger.

"Padma Bank officials have nothing to fear. No one will lose their jobs and banking operations will continue as before. However, we need to see how the roles of the managing directors of the two banks can be incorporated into Exam Bank's operations," he added.

When asked whether the government had pressedfor the merger, Nazrul said that the government had only sent a proposal.

"There was no pressure from the government. We are doing this for the sake of the economy," said Nazrul.

According to Mezbaul Haque, spokesman and director of the central bank, the guidelines and policies for any exemption from the merger process will be outlined by the Bangladesh Bank.

"There is already a guideline set in place. We just have to update it. This is a new experience for us," he added.

Mezbaul said the directors' irregularities and any liability that poses a risk to the bank will be handled according to the state's laws.

"We will be doing this even if there is no merger in question."