Roadmap for Banking Reforms

Roadmap for Banking Reforms

As World Bank data suggests, Bangladesh’s growth always remained in the positive territory since the 1990s, and the country never saw a recession. Its growth even in the COVID year of 2020 turned out to be 3.45 percent still in the positive territory- while it was 7.88 percent in 2019, 6.94 percent in 2021, and 7.1 percent in 2022. The figure is expected to be around 6.5 percent in 2023, as the government predicts.

However, banking, the lifeblood of any economy, faces unique challenges in Bangladesh. A high percentage of non- performing loans (NPLs), inadequate capital, and an overreliance on bank financing are just a few of the many obstacles impeding advancement. Ultimately, banking industry’s prosperity depends on its ability to navigate these obstacles and capitalize on its innovative spirit.

Obstacles on the Path to Progress

Non-performing loans, or NPLs, are a lurking threat. The ratio of NPLs to total loans stood at 9.93 percent in Q1FY24 as per Bangladesh bank data. The ratio of non- performing loans for state-owned commercial banks (SCBS) was a staggering 21.70 percent and for private commercial banks (PCBs) it was 7.04 percent at the end of September 2023.

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Both these ratios are higher than the IMF set condition of an average NPL ratio below 10 percent for state-owned banks and below 5 percent for private commercial banks by June 2023. This not only restricts lending capacity but may also limit access to necessary funding.

PCA: A Bold Move

In a groundbreaking move, the Bangladesh Bank introduced the Prompt Corrective Action (PCA) framework on December 5. This new set of rules aims to ensure stability in our commercial banks, bolstering confidence in the financial system. The framework’s provisions will come into effect on March 31, 2025, based on the annual audited financial statements for the period ending on December 31, 2024.

One shining merit is the focus on early detection and intervention. This means the framework helps banks spot potential risks, like non-performing loans (NPLs), before they become big problems. Imagine it as a financial health check-up, catching issues early to keep the banking system strong.

Roadmap for Reformation

On 4 February, Bangladesh Bank has unveiled a roadmap aimed at addressing the prevailing issues within the banking sector. This comprehensive plan integrates many of the reforms advocated for within the banking industry over the years. BB has outlined three primary goals as part of its roadmap:

  1. To reduce the overall NPLs of banks to below 8 per cent, which currently stand at just under 10 per cent.
  2. To lower the NPLs of state-owned banks to 10 per cent and those of private banks to 5 per cent.
  3. To ensure robust governance within the banking sector, aiming to eliminate over lending, anonymous lending, and fraudulent loan disbursement.

The deadline set by Bangladesh Bank to achieve these targets is 30 June, 2026.

Guidelines for Merger

On 4 April, BB issued a policy for merging banks for the first time, clearly specifying what such process will result in. According to the guidelines-

  • The BB will step in and initiate the process of a forced merger if weak entities keep suffering from capital shortfall, high non-performing loans, and liquidity shortage.
  • For a voluntary merger, the BB and the government will provide incentives to the acquiring institution because thanks to the merger, the financial health of the sound bank may be impacted adversely. The parties will have to get approval from their shareholders.
  • Board members and top executives of the banks and financial institutions that will see a merger will not be able to hold any position in the acquiring entity.
  • No employees of the merged entity could be fired within three years of a takeover by the acquirer.
  • The buyer will enjoy relaxed rules for a specific period when it comes to keeping the cash reserve ratio, the statutory liquidity ratio, the liquidity coverage ratio, and the net stable funding ratio.
  • The acquirer will enjoy facilities from the banking regulator to issue shares, perpetual bonds and subordinated bonds to expand the capital base.
  • Liquidity facilities will be provided to the merged entities on a priority basis under the existing facilities.
  • Assistance will be given to the unified bank in issuing shares, perpetual bonds and subordinated bonds to increase their capital.

Currently, the process or discussion of merging five weak banks with other banks has been initiated, and it is expected to take about three years to complete the legal procedures, as per the central bank. Of these, only Exim Bank has finalized an agreement with Padma Bank.

However, the Bangladesh Bank has said on 15 April that it will not approve any more proposals for bank mergers for now, except for those already in progress.

Beyond Traditional Approaches

Despite these obstacles, a surge of digital innovation is reshaping the financial landscape of Bangladesh. Internet banking users soared 44.6 percent in FY 22-23, reaching 78.1 million, while mobile financial services (MFS) boast over 217 million subscribers in a population of 170 million as of October 2023.

Initiatives like the interoperable Bangla QR and Binimoy platform paved the way for seamless digital transactions, connecting banks, MFS providers, and payment service providers in a unified ecosystem. Bangladesh Bank has aligned the nation’s banking industry with the future of banking through digital banking guidelines and the recent issuance of digital banking licenses.

As digital banking becomes more and more popular, security becomes paramount. Initiatives like the Guideline on ICT Security for Banks and FIs by Bangladesh Bank set the tone for a secure digital financial ecosystem. AI-powered credit assessment tools offered by Fintech are changing the game by assessing borrower credibility and enabling access to financing for high-potential ventures, promoting financial inclusion.

The introduction of ‘Bancassurance’ in March 2024 will provide developing financial system with a new facet. This business strategy, which enables banks to sell insurance products within their branches, brings the convenience and trust associated with banking to the insurance industry. It may simplify the procedure and increase public knowledge of the advantages of insurance products by making them easily accessible to a larger audience.


Essentially, the banking sector should look forward to becoming a one-stop shop for all financial needs. The country can turn its banking sector into a potent growth engine by embracing digitization, investigating novel financial models like venture capital and wealth management, and fostering a culture of collaboration. This is not just about numbers or transactions; it’s about empowering entrepreneurs and individuals, unlocking the potential of small businesses, nurturing a thriving economy, and building a brighter future for all.