The main purpose of this paper has been to examine the relative performance of banking sector in Bangladesh, and to investigate their key problems, and suggest possible remedies. In Bangladesh, the establishment of a market driven private banking system is linked to achieving higher employment, increased productivity, more efficient use of resources and more rapid economic growth.

Financial regulation needs urgent attention to ensure the safety of the financial system during the process of restoring the NCBs to health and as private banking expandnds through privatization and new entry. Prudential regulation and supervision should be upgraded, as should the capacity for enforcement. The legal system requires special attention to safeguard the interest of lenders and  enable them to liquidate collateral in case of default. Finally, accounting and audit standards should be brought up to international levels to support prudential regulation and supervision and to protect lenders. Bangladesh Bank(BB) is the regulator and supervisor of the financial system and is faced with a multitude of difficult banking problems that it must tackle on a large scale. While prudential regulations have been upgraded, much remains to be done to bring them up to international standards. The regulations to be done to bring them up to international standards. The regulations that need to be brought to international standards include capital adequacy, income recognition, asset classification and doubtful bad debt provisions, insider banking, banks’ equity participation in other  companies, lending exposure limits, and liquidity management. Currently, although BB has jurisdiction over issuing bank licenses and bank branching, in practice the cabinet is consulted in most decisions. The application criteria and procedures for banks should be outlined in detail and applicants meeting those criteria should obtain licenses automatically. BB has powers to intervene in problem banks but the procedure is time consuming and inflexible and needs revision.

Loans non performed by one year are considered substandard in Bangladesh but bad by international standards. Many standard loans are actually bad, but it takes years for them to be classified as doubtful and then bad. The cost of bad debts is deferred to the future and many per-1989 bad debts are still not fully provided against. Thus, current borrowers pay high interest rates charged by banks to permit provisioning for bad loans made years ago. Quicker recognition of bad debts, more stringent provisioning requirements and a one –shot full recapitalization of NCBs accompanied by a major management restructuring should lead to lower lending interest rates and avoid a series of NCB recapitalization spread over several years. The one-shot recapitalization would also make current NCB performance more transparent because the impact of poor lending in the past would have been removed.

The regulation limiting bank ownership by one person or group to 5% may need to be relaxed, even though a waiver clause does exist. The regulation has been imposed to prevent the concentration of economic power, but may slow down the privatization of banks and the entry of new institutions. Investors prepared to risk substantial amounts of equity need to have management control. Increased competition and better supervision can check concentration of economic power.

Improved supervision is necessary to lessen the risk of bank failure or losses to depositors. The improvement in bank supervision and bank management information systems will enable Bangladesh Bank to carry out its supervisory functions in a more satisfactory manner. Improved rerouting and supervision of commercial banks will essentially be substituted for releasing commercial banks from direct controls. Finance is an information intensive industry that relies on accurate, timely and transparent information for its functioning and development, Like other South Asian countries, Bangladesh can work with the accounting profession to require all large companies to adopt international accounting and audit standards.

Bangladesh Bank has been reluctant in the past to take action, for political reasons, against banks known to be in bad financial condition except in the most egregious instances of fraud. BB should now intervene more aggressively in troubled banks to develop a sound private system and legal and political barriers to action should private system and legal and political barriers to action should be  dealt with expeditiously and firmly. Delays will prove costly for the Government, and ultimately for the economy. The Bank Deposit Insurance Ordinance was promulgated in 1984. Deposit Insurance is provided for Taka 60,000 per depositor. Membership is mandatory for all banks and the low premium applies to all banks uniformly. The scheme is undefended because of low premiums and lack of investment income and the premium funds are commingled with Bangladesh Bank's funds.

The framework of business laws and legal procedures should facilitate transactions and to enforce contracts in a timely and cost effective manner. Banks and other financial institutions have to be able to foreclose and liquidate collateral in the event of borrower default. Recently several pieces of legislation were passed in Bangladesh to improve its legal framework for the financial system. Among these are the Banking Companies Act, Financial Loan Courts Act, Securities and Companies Commission Act, Act, and the Fi8nancial Institutions Act. The jurisdiction of the financial Loan Courts now needs to be logically extended by amending the law to include the implementation of its decrees. At the moment implementation of Loan Court decrees is done under the Civil procure Code, which takes years and can afford the NCBs little hope of collecting on their collateral within any reasonable time frame. The special foreclosure powers given to development banks have no been used. Thus, much needs to be done to improve contract enforcement, especially to encourage private sector financial institution lending for industrial projects.