THE deadline for undercapitalised banks to meet regulatory capital thresholds is drawing close and some will inevitably exit the banking business, be merged into others or be bought at a discount.

The consequences of failing to comply are dire; and would inconvenience depositors in a big way. But mergers would seem most appropriate at this point, considering the complexities associated with other options.

Regulatory authorities have already indicated that they have no appetite for more extensions for compliance periods and are intent on dealing with the issue conclusively this time around.

While the April 1 deadline came as a surprise for the banks, some of which had been given until next September, the timeline appears harsh but necessary for sound, safe, secure and steady banks.

Compliance with minimum capital requirements is critical, considering the repercussions in the case of a bank failure. The banking sector crisis of 2003-2004 is good testimony of that.

During this period, depositors lost money, had their funds trapped, while other financial institutions experienced a run on deposits once news filtered through that certain banks were struggling.

It will be interesting to note what, if any deal, the three undercapitalised banks — Genesis, Royal and ZABG —   will strike in barely a fortnight to meet the regulatory capital requirements. All banks were given, for all intents and purposes, sufficient time to mobilise resources to beef up their capital levels, some of which were in negative levels. Up to now the three have not complied.

In fact, ZABG has a capital deficit of US$15,3 million while Genesis has negative capital of US$3,2 million, making the case for fresh capital at these two banks more critical than in any other bank.

Analysts believe mergers at this point would not materialise, but would worsen their already weak balance sheets.

“The problem with the undercapitalised banks is that on their own they have negative capital positions and merging with one another would create even weaker balance sheets,” he said.

A foreign investor would seek a huge discount, considering the undercapitalised banks’ situations in terms of the time left until the deadline, which would put shareholders at a major disadvantage.

Royal Bank said it had engaged a Kenyan investor for a US$20 million fresh capital injection while Genesis Bank was discussing with SwissCharge of Zambia, and ZABG was negotiating with the trio of Unicapital of Mauritius, Swiss AFG Global and local private firm Trebor and Khays. Notwithstanding the challenges around raising the US$12,5 million minimum capital for commercial banks, compliance remains critical for a sector that had lost the peoples’ confidence.

Finance Minister Tendai Biti last week gave another hint that there would be no tolerance on non-compliant banks. He said he had instructed the central bank to work on a framework for mergers.

“In order to develop a strong and secure banking sector that is immune to systemic risk,” he said, “I have mandated the Reserve Bank to develop a framework for mergers between the banking institutions, given that some banks are failing to comply with capital requirements.”

Minister Biti said modalities of the framework for bank mergers will be announced in due course. But this needed to be in place sooner rather than later, considering developments in the banking sector.