Worried about the possible erosion of public confidence in the banking sector and market reactions, the Financial Institutions Division (FID) insists on not doing the asset-quality review (AQR) of state-owned banks (SoBs) now.
The review was proposed under the Financial Sector Support Project II (FSSP II), a $400 million scheme to be funded by the World Bank (WB) and implemented by the Bangladesh Bank.
However, upon the FID's insistence, the World Bank has agreed to revise the review requirement, sources say.
According to officials concerned, the project's component-1 is related to the central bank's IT system modernisation, consultancy services, and capacity building initiatives amounting to $103 million.
On the other hand, component-2 consists of performance-based conditions (PBCs) involving $291 million.
It covers eight PBCs, including PBC-8, which is related to SoB reforms.
At a recent meeting on the project, held at the FID with its Secretary Nazma Mobarek in the chair, officials of the division expressed concern over implementing SoB reforms.
They said reducing the non-performing loans (NPLs) to 20 per cent by September 2028 and 10 per cent by September 2030 from the current average ratio of around 45 per cent would be impossible.
Also, they said enhancing capital adequacy ratio from negative to 0 per cent by September 2028 and 10 per cent by September 2030 would be challenging.
Moreover, they highlighted the possible challenges related to public confidence and market reactions, particularly concerning the asset quality review of state-run banks.
According to sources, FID Joint Secretary Sheikh Farid told the meeting that considering the complexity of the issues, the FID had proposed removing PBC-8 from component-2.
The FID secretary opined to redesign PBC-8 considering the real condition of the banks.
"…achieving the targets of NPL reduction and capital enhancement within the stipulated timeframe will be challenging as the current average NPL ratio of SOBs is approximately 45 per cent," she said.
At the meeting, World Bank Country Director Jean Pesme emphasised that as SOB reform was one of the key objectives of the FSSP II project, PBC-8 could not be excluded but might be reframed.
He proposed that PBC-8 be revised by rephrasing the asset quality requirement in line with the views of the FID, the Finance Division, and the Economic Relations Division (ERD).
Contacted, a senior FID official said the asset quality review of SoBs might expose the further distressed state of the banks.
This then might lessen public confidence in the banking sector further, he said.
He also said the central bank had conducted the asset quality review of some private banks by engaging foreign companies and found that those were on the brink of collapse.
Later, five private banks were merged into one to keep them afloat and save depositors' interest, he added.
Dr Mustafa K Mujeri, a former chief economist at the Bangladesh Bank, said not disclosing the true state of the banking sector in the past had enabled large-scale looting through systemic abuse.
He said the real picture was concealed by projecting an image of a sound banking system, but once parts of the actual situation began to surface, it became evident that the sector was in deep distress.
"The state-owned banks have suffered weaknesses and mismanagement for decades, while the cost of corruption and fund embezzlement has repeatedly been borne by the public through capital support from the government exchequer," he also said.
Dr Mujeri warned that the problems would further intensify unless the true condition of the state-owned banks was made public, although the reality would eventually emerge on its own.
Instead of resorting to cosmetic measures, he stressed the need for an immediate asset quality review to reveal the real conditions of the banks and undertaking appropriate reforms to prevent future financial plundering.
syful-islam@outlook.com, jahid.rn@gmail.com
© 2026 - All Rights with The Financial Express
