Finance Minister Abul Hassan Mahmood Ali has said the merger process between banks is anticipated to be both lengthy and challenging.
He also highlighted issues related to non-performing loans and a lack of financial discipline within the banking sector.
The minister raised the concerns in the Medium-Term Macroeconomic Policy Statement, presented with the budget documents in Parliament on Thursday (6 June).
"Non-performing loans and a lack of financial discipline have recently emerged as significant concerns. To address these issues, some banks may need to undergo painful restructuring, such as mergers. However, this process is likely to be protracted and arduous," said the minister.
The idea of merging banks gained traction following recommendations from the International Monetary Fund (IMF), which urged the central bank to devise a roadmap to mitigate default loans as part of the conditions for a $4.7 billion loan package.
In response, Abu Farah Md Nasser, appointed as policy advisor after the expiration of his contract as deputy governor, issued a merger policy. This policy includes the provision of "forced merger" in the event that shortlisted banks fail to merge voluntarily.
The policy offers a safe exit for boards of directors of weak banks, allowing them to return after a five-year hiatus. Furthermore, it provides the management of such weak banks the opportunity to continue their roles in the merged entities.
Following the issuance of the merger policy on April 7, five banks decided to proceed with mergers as instructed by the central bank. These include Sonali Bank with Bangladesh Development Bank Ltd, Bangladesh Krishi Bank with Rajshahi Krishi Unnayan Bank, City Bank with BASIC Bank, United Commercial Bank with National Bank, and Exim Bank with Padma Bank.
However, amidst concerns and confusion among depositors, leading to disruptions in the money market, the Bangladesh Bank announced that it would temporarily suspend any further merger proposals.
Both the World Bank and IMF have expressed apprehension regarding forced mergers between weak and strong banks, cautioning against imprudent mergers without thorough assessments of asset quality, which may prove counterproductive.
