The central bank has turned down proposals for setting up two new commercial banks on the grounds that the deteriorating financial health of many banks, especially the nine that were last set up, does not warrant any new addition to the landscape.

The Bangladesh Bank has communicated its decision in September to Finance Minister AMA Muhith, who had asked the central bank to scrutinise the proposals.

One of the proposed banks is Bengal Bank, initiated by Bengal Group of Industries, a local manufacturer of plastic products. Morshed Alam, a ruling party lawmaker, is the chairman of the group.

The other bank is Peoples Islami Bank, proposed by MA Kashem, a Chittagong-based businessman.

The financial health of many banks would have deteriorated further had the central bank not extended different policy support, said the BB letter.

As of December last year, the total default loans in the sector stood at 9.2 percent and the capital adequacy ratio 10.8 percent of risk-weighted assets. Total stressed advances (defaulted and rescheduled loans) rose to 17.2 percent, up from 16.1 percent a year earlier.

"The indicators show that the banking sector's asset quality is not at a satisfactory level," the letter said.

The health of the nine new banks also deteriorated in recent times, with the default loans of one bank hitting 5.93 percent in March -- alarming for a new bank as the default rate of many of the older banks is less than 5 percent.

The capital adequacy ratio of four new banks was less than 12 percent in March, which indicated that their capital base is not as good.

The central bank had set a number of conditions for the new banks when giving them the licences in 2013, but they failed to implement them.

The BB had asked the fourth-generation banks to disburse at least 5 percent of their total loans as agriculture credit in a year and spend at least 10 percent of their net profit in the interest of underprivileged people under their corporate social responsibility programmes.

The new banks were asked to issue initial public offering equivalent to their sponsors' capital within three years of inception.

Weighed down by poor performance, none of the new banks have fulfilled the conditions, the letter said.

As the financial health of Farmers Bank and NRB Commercial Bank continued to worsen, the BB appointed observers to the boards in January this year and December last year respectively.

The BB faced huge criticism in 2013 when it allowed the nine new banks.

The board of directors of the central bank took a decision in February 2013 that it would not allow any new bank, according to the BB letter.

Despite the board's decision, Shimanto Bank, owned by BGB Welfare Trust, was given licence last year as part of the prime minister's commitment to the organisation.  

"The country's businesses are expanding. So, setting up of more banks will help the businesses," Bengal Group Vice-chairman Md Jashim Uddin told The Daily Star.

He said one or two of the new banks are not doing business in line with expectations, but the other banks are running their operations properly. At present, there are 57 banks in Bangladesh. Of them, 40 are local private banks, nine foreign and eight state-owned.