EXIM-Padma Bank 'merger': Turning rotten apples into fresh oranges?

Bangladesh Bank deserves credit for forging the deal of signing the MoU between EXIM Bank and Padma Bank on March 18. Usually, the central bank does not undertake the responsibility of bringing two banks together and telling the worse-off bank to disappear into the domain of the better one for good. But Bangladesh's case is unique, as all oligarchs and politically empowered tycoons always keep opening up new banks to finance their business conglomerates. Hence, forcing a bank to sink into another one is akin to making a family-based dynasty withdraw its clout from the market, and is hence a tough task. BB has had the guts to make it happen—or to at least start a bitter journey of consolidation for the sake of a better banking environment. This merits big applause and appreciation.

But the event has aroused a few questions. What would be the correct name for this deal in financial parlance since using the word "merger" does not seem appropriate? Will the central bank punish the wrongdoers who emptied Padma Bank in the first place, and forced the government into a banking meltdown? How will BB frame a policy support package especially designed for bidding banks? And finally, what challenges will the banking industry face in the years to come, since some experts anticipate financial sector instability?

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Risk management challenges that our banks face

BB defines the event of March 18 as an "Amalgamation of Padma Bank with EXIM Bank through Merger" in the banner hung at the MoU signing ceremony. However, EXIM Bank's chair termed it a merger or an acquisition, and sometimes a takeover, even though these mean different things in the financial world. The EXIM Bank chair assured us that he'd acted upon his board's initiative. He did not act under any pressure from the government, which had conveyed the proposal to absorb the ailing Padma Bank. Chairman Nazrul Islam Mazumder found it wise to accept the offer to ameliorate the ongoing donyodosha (state of affairs) or the poor condition of Bangladesh's economy.

The appearance of the EXIM chair as a real messiah of the beleaguered economy raises the question of who caused this donyodosha in the first place. The entire deal has no mention of punishing the fund looters who'd brought eight other banks into the red zone as well. The list of big defaulters who dumped Padma Bank on the street should have been made public before such a MoU was agreed upon. Otherwise, habitual defaulters may celebrate the day as one signalling wholesale impunity and legitimacy of the damage they had done to the industry by plundering various banks. Some analysts are placing this deal as a stratagem to hide the black holes and genuine culprits. BB must define its stance as a corrective measure for banking irregularities, not as a cunning ploy to deliver shadow impunity to the wrongdoings of bank directors and staff, as well as those of loan defaulters.

I still remember the fantastic analogies my instructor for the mergers and acquisitions course used when I was an MBA student in Australia. He defined the act of merging as an affair-driven marriage between two adults, and acquisition is a situation where the prince chooses to marry a girl who is not interested in getting married to him. Eventually, the prince manages to marry the girl. Meanwhile, a "takeover" is when the hero hijacks the heroine and weds her quite forcibly. In a merger, companies of a similar genre integrate to expand their market share and enjoy the benefits of constructive collaboration or synergy, which claims that two-plus-two will be greater than four.

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Will merger help solve the weaker banks’ problems?

US-based oil companies Exxon and Mobil made a merger in 1999 and formed the largest company by market capitalisation, ExxonMobil, at the time. In 2005, Google acquired Android, which turned into a success story compared to Microsoft's acquisition of Nokia. In 2000, American Online Inc (AOL) acquired Time Warner in an instance of a hostile takeover. A recent example of a hostile takeover was that of Twitter by Elon Musk in 2022. But none of these deals resemble the case of what EXIM Bank has done for Padma Bank. Rather, the market sees it as a rescue effort by EXIM Bank for the desolate Padma Bank, orchestrated by the central bank. Arguably, it happened under a negotiation that will provide massive comfort to EXIM Bank, which itself is already floundering in the yellow zone.

Analysts predict that EXIM Bank, as a caretaker of the deteriorating Padma Bank, is likely to earn extra benefits for capital requirements, loan provisioning, cash reserve ratio, statutory liquidity ratio, and even foreign exchanges from the central bank. BB did not clarify what extra benefits it will deliver to EXIM Bank or other rescuers, which creates space for speculation. Questions of ethics also come up as to why the bidding banks can earn extra benefits exclusively while others will be deprived of them just because they did not want to absorb a rotten apple. Some banks, or any third party, may hit the courts to fend off legal discrepancies prevailing in the banking sector. This would be a big hurdle for the central bank in finishing its marathon of converting rotten apples into fresh oranges within a year or so.

Dr Birupaksha Paul is a professor of economics at the State University of New York at Cortland, US.

Views expressed in this article are the author's own. 

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