DFCC, NDB terminate merger MoU

Joint statement doesn’t rule out amalgamation; says will revisit at a future point if needed

DFCC and NDB yesterday in a joint statement said they had decided to terminate the Memorandum of Understanding entered into to explore amalgamation. The joint agreement is effective from 11 May whilst the MoU was signed in March last year.

 The original plan was to amalgamate DFCC, DFCC Vardhana Bank and NDB following consolidation within the financial services sector championed by the former regime at the Central Bank.

“The termination of the MoU will enable both banking groups to pursue their respective business and expansion strategies unfettered by the provisions of the MoU but will not preclude re-examination of the feasibility of amalgamation at a future point in time once the policy and the stance of the Government becomes clearer,” the joint statement by DFCC and NDB added.

In the original statement last year, the two entities said that in pursuance of policies announced by the then Government to encourage consolidation, the two Boards “realising the positives in this model have taken the initiative to explore the possibilities of amalgamating.”

In July last year, Boston Consulting Group India Ltd. was hired as the consultant to advice the banks on the amalgamation process.

Following the change of regime, the Government appointed an experts committee headed by Dinesh Weerakkody to review the consolidation process and make suitable recommendations on the way forward.

The committee, in its report released in early April, said creating an enabling environment for voluntary consolidation of banks was a normal business activity and this should be actively encouraged by the new government by providing the required legal framework and removing impediments and disincentives (e.g. taxation and manpower related).

Therefore, the decision to consolidate should be driven by the entities themselves. However, even in a voluntary consolidation the successes of mergers are limited. Therefore mergers to be carried out within a stipulated timeframe as stipulated in the Central Bank master plan will have an even smaller chance of succeeding and therefore should be avoided in the future. When banks consolidate voluntarily, they take the needed measures to protect their own interests and would not participate in any Merger or Acquisition unless it is driven to benefit all stakeholders.

Since experience suggests that some stakeholder groups may oppose consolidation to safeguard their own vested interests, the Central Bank can encourage consolidation by implementing a differentiated regulatory regime depending on the size and strength of banks as measured by key prudential factors.  

In Singapore, prior to initiating financial sector consolidation, an enabling environment was created by introducing the necessary legislative changes to avoid post-consolidation ambiguity.

Sri Lanka’s Banking Act and Directions too needs amendment to provide a robust platform for both organic growth and consolidation, the committee noted.