After a quiet spell, the Bangladesh Bank on Tuesday ignited fervent discussions in the country's financial epicentres with two bold moves: one aimed at merging banks and the other targeting travel restrictions for loan defaulters. 

The central bank’s Executive Director and Spokesperson Mezbaul Haque informed the journalists that the regulator plans to merge 10 banks within a year to address the ailing banking sector, particularly focusing on larger institutions grappling with mounting bad assets, which are now teetering on the brink of financial collapse.

“Following the merger, the weak bank can become the strong bank while strong banks can be stronger banks,” he told reporters in a press briefing at BB headquarters in the city at a time when the big banks are on deathbeds with mounting classified loans amounting to more than over Tk9,000 crore out of the total Tk14,543 crore in the whole banking sector.

In his address to reporters during a press briefing at the BB headquarters in the city, Mr Haque emphasized the transformative potential of mergers, stating, 'Through these mergers, weaker banks can emerge stronger, while already robust institutions can fortify their positions further.' His remarks come at a critical juncture, with major banks facing imminent collapse due to a staggering accumulation of classified loans exceeding Tk9,000 crore, a significant portion of the total Tk14,543 crore burdening the entire banking sector.

This high level of bad loans is like cancer for banks as it is eating away the profitability of banks forcing them to run lower interest income and keeping bank CEOs awake at night for frequent battles in boardrooms. 

Such a large amount of bad assets are eating away banks' profits which is one of the three major domestic risks that our economy faces, according to the International Monetary Fund (IMF) – something that our economic experts have been flagging for years.  

Most state-run banks like Basic Bank, Sonali Bank, Janata Bank, Agrani Bank and Rupali Bank are on deathbeds with high bad debts. The Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank and Probashi Kallyan Bank – these three specialised banks could not maintain the CRAR, on the contrary, their deficit increased.

Cancer has expanded to private territory in front of the central bank run by imminent retired bureaucrats as the central bank is frequently dictated by their previous stations- the Finance Ministry. So, some private banks like Islami Bank Bangladesh, Pubali Bank, United Commercial Bank, NCC Bank, NRB Commercial Bank, and One Bank are facing a very tough time to earn dividends as the amount of their interest rate suspended money is higher and rising day by day. These banks once were identified as the best banks in Bangladesh. 

Weak corporate governance and credit management, inadequate credit regulations, and the degree of political interference are the main contributory factors to this situation. Findings indicate that the credit operations and performances of private commercial Banks have outperformed those of state-owned commercial banks. The loan disbursement approaches of state-owned commercial banks were not efficient enough to achieve the required recovery target.

Bad loans grow quietly within a bank's balance sheet, just like cancer cells can multiply unnoticed in the body. Initially, they may appear manageable, but if left unchecked, they can spread and weaken the bank's financial stability over time. The state-owned banks are on deathbeds with a huge amount of bad loans.

To cure the ailing banks, Bangladesh Bank earlier set a harsh 11-point roadmap to realise default loans and ensure good governance in bank operations to reduce overall defaulted loans to 8 per cent, state-owned bank defaulted loans ratio to reduce by 10 per cent and 5 per cent respectively, and reducing fraud, disguise and limit cross loan disbursement to zero level,

But all efforts went in vain as the defaulters are powerful businessmen who have remained stronger than regulators for a long. Most defaulters are very powerful forces in our society linked to the higher-ups who cannot ignore the responsibility to clean up the mess.

For example, SM Amzad Hossain, the chairman of the new generation South Bangla Agriculture and Commerce (SBAC) Bank who defaulted on Tk 58.61 crore loans with Janata Bank ran away abroad in front of the government and Bangladesh Bank.

Two brothers, MA Kader and Abdul Aziz, The Jaaz Multimedia owner owe crores to the state-run Janata bank. He wrote in social media: “We are going to make three films with Hollywood co-producers. All three - shot entirely in Europe, America and Asia, will have a global premiere. In the process, many Bangladeshi artists will obtain global fame, including ABM Sumon who was cast in the Masud Rana role.”

A defaulter cannot be a bank’s director but the central bank has not taken any action against him yet. The crucial question was raised: Does the central bank want to solve the "bad loan" problem?

To answer this question, Bangladesh Bank this time has taken a merger plan which has ragged debate among bankers and financial market experts. Can mergers be the panacea for the floundering financial sector?

More than a dozen other banks are also experiencing financial difficulties due to high levels of default loans and scandals, putting pressure on the banking sector and fuelling debates about potential mergers.

Secondly, there is also concern regarding identifying the actual weak banks as the banks of influential people might be left out of the list of weak banks. So maybe the case with weak state-owned ones forcing the national economy to bleed for them.

Alongside this, there will be general challenges like financial risks. For example, asset quality deterioration, increased operational costs and liquidity challenges, human resource and technological integration, and customer retention amid the uncertainty of merger.

A bank CEO said there is no incentive for the good banks currently to take over the responsibilities of the weak banks as this might lead to a decline in their financial indicators. So, Bangladesh Bank needs to issue specific guidelines in this regard, outlining clear incentives to motivate good banks to come forward and revitalise the sector.

Failure of the regulators to bring weak or notorious banks under command or incentivise the good banks for long has raised a lot of suspicion among important stakeholders about the honesty of purpose, he said.

Bangladesh now holds the second position in South Asia in terms of bad loan ratio, according to a World Bank report. We are behind Sri Lanka only, but that should not provide any comfort considering the collapse of Sri Lanka's economy last year. 

An overarching reform in our financial sector is imperative to establish good governance and enforce stringent regulations to curb detrimental lending practices. However, as immediate measures, the Bangladesh Bank's merger initiatives and travel bans may yield tangible results. Only time will tell.