Padma Bank in deep waters as government changeover stalls merger plans

The bank's liquidity situation has worsened due to the halted merger process

The merger process initiated seven months ago to rescue struggling banks as part of financial sector reforms has become uncertain following the sudden change in government.

The merger was initiated with the promise of saving ailing banks.

The Padma and Exim Banks had completed their audits as part of the merger requirements, and the audit reports were submitted to the central bank.

However, no one can specify the next steps in the merger, leaving Padma Bank in a precarious position.

Since signing the agreement in March, Padma Bank has effectively ceased collecting deposits, stopped issuing new loans, and is only managing existing loans while conducting daily banking operations at its branches.

The bank's Managing Director Tarek Riaz Khan resigned a month after the agreement to merge with Exim Bank and has since joined another private bank.

Moreover, Afzal Karim, managing director of Sonali Bank, who previously served on Padma Bank's board, was removed after the interim government took office.

Similarly, the positions of managing directors from three other state-owned banks—Janata, Agrani, and Rupali—have also become vacant, further depleting Padma Bank's board.

The loss of four directors has rendered Padma Bank unable to convene board meetings. This leadership crisis has left employees and customers in a state of uncertainty about the bank's future.

HOW THE MERGER CAME ABOUT

In response to a loan scandal and liquidity crisis plaguing the financial sector, the central bank initiated the merger of weaker banks with stronger ones last December.

The former governor Abdur Rouf Talukder announced a merger of ten weak banks with stronger ones.

The central bank created a framework called Prompt Corrective Action, or PCA, in December, outlining various performance targets and potential penalties, including mergers, for banks that failed to meet these goals.

The intention was to implement the PCA after reviewing the annual financial reports for 2024, with the expectation of identifying a list of weak banks by March 2025.

In February, the central bank introduced a roadmap comprising 17 reforms aimed at reducing the rate of non-performing loans, which included recommendations for merging weaker banks with stronger counterparts.

Amid these discussions, a sudden announcement in March declared the merger between the struggling Padma, formerly Farmers, Bank and Shariah-based Exim Bank.

Under the central bank's mediation, the two banks signed the merger agreement. When discussions arose regarding the merger process, the central bank clarified that commercial banks could merge voluntarily; otherwise, the central bank would intervene after December 2024.

In April, the central bank issued guidelines on the voluntary merger of banks and companies, saying: "The primary aim of this initiative is to address the existing issues of relatively weak banks while enhancing the operations of stronger banks to strengthen the financial sector, enabling merged entities to provide better services in the public interest."

To encourage stronger banks to merge, the central bank announced policy incentives, including exemptions from various required provisions related to maintaining minimum capital reserves and liquidity ratios.

GOVERNMENT CHANGE HALTS THE MERGER

On Aug 5, following a student-led uprising, the Awami League government fell, leading to the departure of former prime minister Sheikh Hasina. An interim government took office on the evening of Aug 8.

After the new government assumed power, leadership changes occurred in financial institutions, including the central bank, with Ahsan H Mansur appointed as the new governor.

The interim government also formed a task force to reform the financial sector, including banking reforms.

Following the new governor's appointment, previous initiatives in the banking sector lost momentum, and the merger discussions were effectively stalled.

There had been plans to determine Padma Bank's liabilities and asset values after the audits to establish share prices before Exim Bank took over, resulting in the dissolution of Padma Bank's name.

Formalities for approval from the Securities and Exchange Commission and the High Court were also pending, but the new board of Exim Bank has since ceased taking any further steps.

EXIM BANK AWAITS 'BETTER TIMES' AMID MERGER UNCERTAINTY

After serving as the chairman of Exim Bank for 17 years under the previous government, the influential figure in the banking sector, Nazrul Islam Majumder, witnessed significant changes following the fall of the Awami League government. The new governor has reshaped the boards of 11 banks, including Exim Bank.

While former governor Rouf described Exim Bank as a 'good' bank during the merger agreement, the new board expresses a different perspective just four months later.

Current Chairman Nazrul Islam Swapan told bdnews24.com: “What can I say? The bank has been left empty. We are managing, and while there is a liquidity crisis, it’s not as severe as others. We've managed to handle this much.”

Swapan said Exim Bank cannot take on the responsibility of more than sixty branches from Padma Bank.

He added, “We are waiting for better times. The bank needs to improve first, and only then will we consider taking on Padma Bank or the merger.”

When asked when this desired 'better' time might come, he said: “It will take at least four to five months to know. We cannot say anything before that.”

Although he spoke about the need for patience, Swapan did not provide a clear answer regarding whether the merger agreement would be cancelled.

PADMA BANK SEEKS ANSWERS

In light of the government change and shifts in banking leadership, Padma Bank is anxious about the continuation of the merger initiative. To gauge Exim Bank's stance on the matter, Padma Bank's acting managing director Kazi Md Talha met Swapan last week but received no satisfactory response.

Swapan told bdnews24.com: “I’ve told the acting MD of Padma Bank that I cannot make any decisions regarding the merger for now. It will take time, and then we will see.”

The Bangladesh Bank, which has taken on the coordinating role for merging commercial banks, is currently not communicating anything to the banks involved in the merger.

As a result, the merger process has effectively stalled, increasing the risks for struggling Padma Bank.

New governor Mansur has indicated that considerations regarding the merger will follow recommendations from a task force.

Echoing this sentiment, Bangladesh Bank spokesperson and executive director Husne Ara Shikha said: “There is currently no discussion about merging banks. We will wait for recommendations first.”

Officials from the central bank's relevant departments are uncertain whether they will resume the previous merger process after the new recommendations. They argue that many aspects will change, and decisions will depend on the conditions of the banks at that time.

WERE THERE FLAWS IN THE PROCESS?

After the Bangladesh Bank issued guidelines on mergers, the state-owned Sonali Bank agreed to assume the responsibilities of the Bangladesh Development Bank PLC, or BDBL, mirroring the arrangements made with Exim and Padma banks.

Meanwhile, discussions about merging National Bank and Basic Bank with other banks reached a final stage but did not culminate in a formal agreement.

There were also talks of merging the Rajshahi Krishi Unnayan Bank, or RAKUB, with the state-owned specialised bank, Bangladesh Krishi Bank.

Plans were also underway to transfer the responsibilities of the state-owned Basic Bank to the private City Bank.

The central bank limited discussions to five proposals to merge these ten banks.

At that time, Mezbaul Haque, who was serving as the spokesperson for the central bank, told bdnews24.com: “By implementing these five proposals, we (Bangladesh Bank) will gain experience; we also need experience. After that, we will see.”

It was explained that the merger of banks would involve a complex process, including the appointment of auditors, determining assets and liabilities, fixing share prices, defining share portions, and legal procedures. Completing all the legal processes for merging these five banks could take three to four years.

During that period, the National Bank and Basic Bank objected to the merger. Now, under the new circumstances, these banks are not considering mergers.

Zahid Hussain, a former lead economist at the World Bank's Dhaka office, believes that the merger process initiated last December was not well thought out. Instead, it seemed more of an effort by the central bank to “show that something is being done.”

He told bdnews24.com: “This was a piecemeal initiative. A thorough audit of the banks had not been conducted before this was implemented. The specific problems of the weak banks were not identified, as issues vary from bank to bank.

“Some may face liquidity crises, while others might have management issues. These need to be pinpointed first. Only then can a solution be determined. In this context, a merger is just one option; there are other alternatives as well. The applicability of these options can only be determined after understanding the actual condition of each bank,” he said.

He argues that procedural flaws are why this sensitive initiative like a merger is now failing to reach any significant outcome.

According to him, banks that had entered into agreements should reconsider their positions under the current circumstances.