Bangladesh Bank (BB) issued a comprehensive guideline that mandates that board members and top executives of banks and financial institutions involved in a merger will not be able to hold any position in the acquiring entity.
The directive, which encompasses provisions for both mutually agreed-upon and forced mergers, emphasizes the priority of safeguarding depositors’ interests. It stipulates that depositors’ accounts must be either continued within the merged entity or their funds returned.
The BB guideline outlines a protective measure for employees of the merged entity, stating that no staff can be terminated within three years of the acquirer’s takeover.
This initiative follows BB’s issuance of the Prompt Corrective Action (PCA) framework four months ago, aimed at providing procedural guidance for mergers and acquisitions amidst concerns over the deteriorating financial condition of certain banks and financial institutions.
In cases of forced mergers, the BB will adopt a phased approach. Banks will be categorized based on various financial indicators, and those identified as weak will be given a 12-month window to improve their performance. Should these vulnerabilities persist, the central bank will encourage voluntary mergers. It will intervene and facilitate forced mergers to address capital shortfalls, high non-performing loans, and liquidity issues if necessary.
Notably, the guideline cites the recent agreement between Shariah-based Exim Bank and struggling Padma Bank as an example. Additionally, it mandates the consolidation of operations among four state banks – Bangladesh Development Bank Ltd, Sonali Bank Rajshahi Krishi Unnayan Bank, and Bangladesh Krishi Bank – to fortify the banking sector against challenges such as high default rates and governance deficiencies.
For mutually agreed mergers, interested parties must secure approvals from their respective boards before seeking primary consent from the BB. The central bank will appoint an auditor to conduct due diligence on the proposed merged entity, and lenders will require consent from majority shareholders before obtaining final approval from BB.
In forced mergers, the BB reserves the right to dissolve the boards of weak banks or financial institutions and appoint administrators. Subsequently, bids will be solicited from interested buyers, and if necessary, one or more banks may be mandated to acquire the struggling entity.