Both Sonali Bank and Bangladesh Development Bank Ltd (BDBL) have received primary approval from their respective boards to initiate a merger between the two state-run commercial banks.

The two banks have formally informed Bangladesh Bank of their interest in the merger after their respective boards reached the decision through recent meetings.

The board of directors of BDBL approved the merger plan in an emergency meeting on April 8, said Md Habibur Rahman Gazi, managing director and CEO of the bank.

Meanwhile, the board of directors of Sonali Bank gave its approval in this regard during a regular meeting held on April 4, according to a senior official of the bank.

Talks of the potential merger were first raised at a meeting among officials of BDBL, Sonali Bank and Bangladesh Bank at the central bank headquarters in Dhaka on April 3.

But although it seems the two banks reached the decision on their own, the government had previously decided in principle to go ahead with the merger and only later informed the banks about its plan.

Bangladesh Bank recently decided to introduce mergers between weak banks and strong ones in an effort to revitalise the country's financial sector.

However, such moves previously proved ineffective as the BDBL, which was formed from the amalgamation of Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha in 2009, continues to crack under the weight of bad loans.

The BDBL's non-performing loans amounted to Tk 982 crore as of December, accounting for 42.46 percent of its total disbursals.

Meanwhile, Sonali Bank had disbursed loans of Tk 93,096 crore by the end of 2023, of which Tk 13,150 crore, or 14.1 percent, had turned sour, central bank data shows.

Bangladesh Bank has received five merger proposals so far and does not plan to take on any more applications until these initial bids are completed.

Under the five proposals, state-run Sonali Bank wants to acquire BDBL and Bangladesh Krishi Bank (BKB) wants to take over Rajshahi Krishi Unnayan Bank (Rakub).

City Bank, a private commercial bank, wants to acquire the state-run BASIC Bank while United Commercial Bank plans to buy National Bank and the shariah-based Exim Bank wants to absorb Padma Bank.

Earlier in March, Bangladesh Bank Governor Abdur Rouf Talukder formally informed the bank owners that they could decide to merge voluntarily within December.

Afterwards, the central bank would decide which weak banks would merge with sound ones under a Prompt Corrective Action (PCA) framework, he added.

The PCA framework, which would help determine the health of banks, is scheduled to be implemented from March 2025, based on performance and financial indicators as of December 2024.