Until the early 1980s, the Government owned, controlled and directed Bangladesh’s financial system with the objective of allocating funds to priority sectors. Loan recovery was not emphasized because loans were collateralized and considered ultimately collectable. The quality of financial intermediation, judged by loan recovery rates, was dismal. Bangladesh had virtually no private banking and role the private sector was considered secondary. In the early 1980s, the Government began to reform the financial sector. Interest rates on deposits were raised to provide a positive real return on deposits, private banks were allowed to enter, two NCBs were denationalized and another nationalized bank was converted into a limited liability company and partially privatized.

Recognizing the need to reform the financial sector, the Bangladesh Government appointed a National Commission on Money, Banking and Credit to undertake a major study of the financial sector in late 1984.The commission made its recommendations for financial sector reform in 1986 The problem of loan delinquency delinquencies was recognized as a key issue that needed to be addressed. Restoring the financial strength of banking institutions and introducing more flexibility into the financial system were identified as important strategies to revive the banking sector’s crucial role in financial intermediation, and ensure its stability.

In 1990, the Bangladesh Government started with a five-year financial sector reform project with the fooling ten agenda:

a. Introduce a more liberal interest rate policy; b. Introduce and implement an improved loan classification system; c. Introduce capital adequacy requirements and enforce these on the banking system; d. Develop improved supervision systems for the banks and use such systems to manage short-falls in capital adequacy and to identify problem areas within the banking system; e. Develop money market instruments and initiate the auctioning of a short term money market instrument: f. Improve the operation of the capital markets and take the regulatory steps needed to improve such markets: g. Clean up the jute debt in the commercial banking system and eliminate any risk to the commercial bank portfolio: h. Reform the NCBs in a three step process: 1. Recapitalize the NCBs: 2. Improve their operating systems: 3. Develop strategic approaches to their future development; i. Improve loan recovery through introduction of better legislation and course to collect delinquent loans, improve the bankruptcy law to ease the problems of liquidating companies, improve the flow of credit information for new loans, and require NCBs to improve their debt collection; J. Initiate an immediate program of improvement in manpower through upgraded training for bankers.

Policy changes under this program have introduced flexibility in interest rates on deposits and loans and improved prudential regulations and supervision of banks. The impact on the quality of intermediation is, however, not known it and a private industrialist still can not obtain financing for a large project without having to approach a Government-owned commercial or development bank.

It is apparent from the above agenda that the NCBs improve their efficiency and profitability to restore viability, through the improvement of their management, organization, credit extension Banks need to establish a system whereby the performance of managers is monitored and evaluated against targets, and rewards and penalties given accordingly to motivate staffs. Credit criteria for lending should be strengthened with more emphasis placed on a borrower’s creditworthiness than on his collateral.

Monitoring and collection of loans needs to be streamlined. Uniform accounting standards for branches and reconciliation of interbranch accounts are necessary. Effective internal auditing should be introduced. This research intends to address these issues so as to suggest future course of action needed to resolve the existing banking crisis in Bangladesh.