Rejecting the proposals for the formation of 2 (two) new commercial banks in Bangladesh, the Bangladesh Bank has indicated that the banking sector's asset quality is not at a satisfactory level. Until recently, the total defaulted loans and the capital adequacy ratio in the banking sector had been deteriorating. It is clear that the deteriorating performance of Bangladeshi banks needs to be addressed immediately given that Bangladesh Bank has directed all scheduled banks to implement BASEL III by 2019. BASEL III reforms are aimed to strengthen the bank's capital requirements by increasing bank liquidity and decreasing bank leverage. Its main aim is to make banks more resilient against risks by maintaining a stable capital adequacy ratio, improving risk management and strengthening governance.

Against the above background and as a result of the introduction of BASEL III requirements, it is felt that there may be an increase in the merger of banks in Bangladesh in the future. This is because some banks may find their business model unsustainable from a capital or liquidity perspective and it will be easier for them to fulfill the capital requirements of BASEL III if they merge. Alongside fulfilling the BASEL III requirements, the merged bank will also enjoy the benefit of a greater market share.

Mergers between banks in Bangladesh is not a common phenomenon but the concept is not entirely new. In the past, 2 (two) banks, namely Bangladesh Shilpa Bank and the Bangladesh Shilpa Rin Sangstha, merged to form Bangladesh Development Bank Limited in 2009. However, it must be noted that the practice of bank mergers is still at its nascent stage in Bangladesh. A guideline titled “Guidelines for Merger/Amalgamation of Banks/Financial Institutions”(the “Guidelines”) has been issued by the Bangladesh Bank in a bid to provide guidance to banks on this important issue.

At the outset, it is important to note that, in order to determine the transaction price, the financial (and also legal) due diligence of the transferor bank is key to a bank merger in Bangladesh. Prior approval is needed in this regard from the Bangladesh Bank. The valuation of the assets of the banks as well as the transaction price of the merger must be mutually agreed on by the banks. However, the Bangladesh Bank must be satisfied that the mutually agreed transaction price is fair and reasonable in the circumstances. This gives the Bangladesh Bank sufficient discretion to keep a check on the transaction price. The Bangladesh Bank may also play the role of a mediator if there is any disagreement with regards to the valuation of the banks' assets. The Bangladesh Bank even has the authority to decide the value of the assets if the mediation fails, and the decision of the Bangladesh Bank shall be final and binding in this regard.It follows that the Bangladesh Bank has an active and pivotal role with respect to merger of banks in Bangladesh.

The scheme of merger that is required to be submittedmust be prepared on the basis of the findings of the due-diligence report. The scheme of merger should be approved by the Board of Directors by holding respective meetings in accordance with the Companies Act 1994. The banks, intending to merge, are then required to submit their scheme of merger, approved by their respective Board of Directors, along with a financial and legal due diligence report to the Bangladesh Bank. The Bangladesh Bank will then examine the draft scheme of merger in light of various factors such as the impact of merger on the market share, capital of the merged entity, share pattern of the merged entity etc. If the Bangladesh Bank is satisfied with the draft scheme, it willthen issue its approval with or without any modification(s). In order for a bank merger to take place, the Bangladesh Bank must be satisfied that the merger is not detrimental to the interest of its depositors or the financial system of Bangladesh.

The transferee bank must then seek to comply with the requisite formalities of the Companies Act 1994 and file an application before the concerned Court and submit the scheme of merger for legal sanction. It is important to note that the approval of the Bangladesh Bank is important as the relevant Court in Bangladesh will not approve any such arrangement between a bank and its members unless the same is certified by the Bangladesh Bank. After hearing the application for merger and after considering objections (if any)raised by any of the stakeholders, the Court may approve the scheme of merger. The transferee company is then required to file a certified copy of the Court's order with the Registrar of Joint Stock Companies and, on such filing, the scheme will become effective and bind all creditors, shareholders and the banks itself. A copy of the approved scheme should then be forwarded to the Securities and Exchange Commission by the transferee bank for its consent for issue of capital, if required. As regards the transferee company, if no change of name is proposed, the transferee bank will continue to carry on its business under the existing name and license. However, if there is a change of name of the transferee bank, the said bank will have to seek approval of the Bangladesh Bank.

The role of the banking sector in facilitating growth is solely dependent on the strength and profundity of the sector. As mentioned above, many Bangladeshi banks would need to bring in significant changes if it wishes to stay compliant with the Basel III requirements. Banks with financial deficiencies may need to merge with healthier banks in order to stay afloat and maintain an adequate capital ratio. Otherwise, it may lack the ability to absorb any shocks from economic stress.