Finance Minister AHM Mustafa Kamal recently spoke in favour of liquidation or merger of 'weak and inefficient' non-banking financial institutions (NBFIs).
The minister gave his opinion at a meeting with the chairmen and managing directors of 34 NBFIs. He also asked the top notches of NBFIs to do whatever necessary to reduce the volume of soured loans and run their institutions efficiently.
The meeting was obviously organised against the backdrop of some unexpected developments involving some NBFIs. One NBFI, the People's Leasing and Financial Services Ltd (PLFSL), has already been liquidated and, at least two more are having difficult time in repaying the depositors' money. The liquidation of the PLFSL has, naturally, hurt the business of other NBFIs. These institutions are now required to put extra efforts to lure funds from general as well as corporate investors.
The factors that have made some NBFIs financially sick are almost identical to ones that are also ailing a number of banks, private and public. Irresponsible lending, insider lending, dictated lending and weak regulatory control are thought to be the major reasons behind the problems that are being encountered by both banks and non-banking FIs.
The liquidation done in the case of PLFSL might have been necessary. But, timely step on the part of the regulator could have avoided this extreme outcome. The possibility of merging it with some other NBFI could be explored. Since some more NBFIs are having problems, the option of merging those with some other NBFIs needs to be explored by their sponsors. The Bangladesh Bank can also play an important role here. Merger does help protect the interest of both depositors and shareholders, to some extent.
Recently, a number of state-owned banks and an investment institution have saved a fourth-generation private bank from going bust and liquidation. They acquired the majority stake of the bank, however, at the dictate of the Ministry of Finance. The state-owned bank themselves are having problems because of their soaring non-performing loans. These banks do regularly seek capital replenishment from the government.
So, the state-owned banks do not have the capacity to be saviours for some other troubled banks or NBFIs. Under the circumstances, M&A remains the best option. However, merger would bear no fruit if the same happens between two or more weak institutions. The relatively healthy financial institutions do need to take over the weak ones with certain cost advantage. Such merger or takeover does help protect the interest of both depositors and shareholders.
Here, an obvious question would agitate the minds of many: Is there an adequate legal framework in Bangladesh to facilitate unhindered M&A. At the moment, there is no specific M&A law in the country. However, certain other laws and rules are there in the arena of banking and capital market to help the process going smoothly.
However, M&A would happen only when all the parties concerned are interested in going for it. M&A is a regular phenomenon in most developed and many developing countries. Yet the authorities might examine the need for enactment of a specific law for the process of merger and acquisition. If a specific law does help the process of M&A, it should be adopted in the light of experiences gained by some other countries.