The government will seek financial assistance from the World Bank to help the state banks meet a huge capital shortfall that stemmed from years of bad governance.

The WB finds four state banks have a capital deficit of Tk 17,600 crore ($2.2 billion), while Bangladesh Bank sees the figure at Tk 10,340 crore as of June 30.

With the huge capital deficits, the banks will face problems in international transactions and a dearth of confidence in the local market as well, the WB said.

A finance ministry official said the lender has assured the government of giving the support to meet a portion of the shortfall, but the loans will have tough strings.

A WB team held a series of meetings with the officials of the finance ministry and the central bank from August 3 to 8 and has recently sent a draft “aide-memoire” to the government.

The team also discussed the overall situation in the banking sector in recent times, especially how the banks’ financial health deteriorated.

The government will soon send a letter to the WB seeking the support, the ministry official said.
Finance Minister AMA Muhith will go to Washington next month to attend the WB’s annual meeting and will hold detailed talks on the matter with the high officials of the lender.

The Banking Division told the WB team that the government has allocated Tk 5,000 crore ($633 million) to recapitalise the banks but the amount is not enough to help them maintain capital at 10 percent of their risk weighted assets.
“The mission was informed that the government appreciated the past involvement of the WB in the restructuring of the state banks through the Enterprise Growth and Bank Modernisation project, and would like the WB to remain engaged,” according to the draft aide-memoire.

The banks’ financial health improved due to the WB project taken during the last BNP regime, it said.
However, the lender said, to get the financial support reintroduced, the BB will have to prepare a list of 150-200 professionals and appoint directors of the state banks from them.

The government will have to divest part of its shares in the state banks to bring down its control of the banks, according to another condition of the WB.
The government will form an expert panel in consultation with the central bank to decide on the amount of capital the banks need. The government will also provide the capital in phases, not in a chunk, the WB said.

Before giving the capital, the panel will evaluate the banks’ performance indicators every three months.
The WB also recommended picking independent directors for private banks from the list to improve the governance of the overall banking sector.

After the present government assumed office, large-scale politicisation in selecting the state banks’ directors, and corruption took a huge toll on the financial health of the banks. The BB also alerted the finance minister to the wrongdoings on various occasions.

However, the Banking Division informed the WB team that some steps have already been taken to bring changes to the top management and boards of the banks.