Padma Bank, grappling with a long-standing burden of toxic loans, is set to merge with EXIM Bank, marking the first such merger in Bangladesh.
“We have decided to acquire Padma Bank during our board meeting today,” stated Nazrul Islam Mazumder, chairman of EXIM Bank, in an interview with The Daily Star. Bangladesh Bank (BB) has emphasized that mergers are no longer a matter of choice; designated banks must merge voluntarily, or BB will intervene directly. While mergers are intended to rescue struggling banks, they should not be viewed as a cure-all for the sector’s woes. The decay within the financial sector has been accumulating for years. BB has attempted, albeit unsuccessfully, to address the issue of nonperforming loans (NPLs), and for valid reasons. The effectiveness of the new merger in tackling the burden of bad loans, prevalent in both institutions, remains uncertain. This crucial aspect is yet to be resolved, pending the unveiling of the merger and acquisition (M&A) framework by the central bank.
The ambiguity surrounding how the post-merger bank will confront the bad loan crisis underscores the need for clear regulatory interventions from BB. Concerns have been raised off the record by bankers regarding the numerous uncertainties in the merger process. For example, the acquisition involves a publicly listed bank absorbing a non-listed one, which has been embroiled in controversy since its inception. Allegations of wholesale loan approval in violation of banking regulations have plagued the bank since 2013. Thus, the outcome of the merger, whether it will salvage the institution or endanger the parent bank, remains to be seen.
The government’s efforts to prevent a collapse in the banking sector are understandable. However, the broader issue of rescuing the sector from years of financial mismanagement requires concerted action not only from BB and the Ministry of Finance but also from within the sector itself. One significant policy oversight has been the failure to address why regulatory amendments a decade ago transformed banks into family-run enterprises.
These changes allowed families to exert controlling interests on bank boards, leading to a surge in NPLs that pushed many previously viable banks to the brink of collapse. Without rectifying these regulations, meaningful improvements in the financial health of the banking sector are unlikely, regardless of the central bank’s efforts.