An advisory council meeting at the Chief Adviser's Office gave the seal of approval to the draft Memorandum and Articles of Association, meaning autonomous boards of directors instead of the finance ministry would run the three banks.

This is the second policy decision of the caretaker government that is constitutionally mandated to carry out only routine government functions while assisting the Election Commission to hold the national polls. Last week, the interim administration signed a contract with an Indian company to set up a 240-megawatt power plant at Siddhirganj.

Last year, a finance ministry proposal for converting the state-owned commercial banks into public limited companies (PLCs) was rejected in the face of strong opposition from the other cabinet members.

Freeing the nationalised banks from government control through corporatisation is one of the major conditions that the World Bank (WB) set for the country to receive the $200-million fourth instalment of Development Support Credit.

According to the draft approved yesterday, the government or the finance ministry would not be able to interfere in the banks' decisions on disbursement of loans, recruitment, and promotions including those to the vital posts like general managers, managing director, and deputy managing directors.

A maximum of 13 members to be appointed by the government would comprise the board of directors. They would be accountable to the Bangladesh Bank (BB) the way private commercial banks (PCBs) are.

The central bank will monitor the NCBs to create a level playing field for all banks in the country, sources add.

In the early nineties, the Rupali Bank was changed into a public limited company but it continued to operate like all other nationalised banks due to restrictions set out in the memorandum and articles of association. But this time, the rules have been altered so that the government involvement is confined only to appointment of the board directors.

A BB source said when the central bank's reform programmes have improved the performance of the private banks, the NCBs lag far behind thanks to government control and political interference in loan disbursement.

Low-yield investments in the sectors prioritised by governments often result in defaulting on loans. Political leaders pressure banks to disburse loans against projects that are mostly evaluated to be unfeasible.

In order to do away with the problems, both the WB and the International Monetary Fund (IMF) proposed wide-ranging reforms in the banking sector, the first being the corporatisation of the NCBs with plans for full privatisation.

The decision to corporatise the NCBs is considered a major step towards the reforms prescribed by the Bretton Woods institutions with plans to eventually remove all government controls from the banks.

The WB and IMF have long been pushing for privatisation of the NCBs. They have made it one of the major prerequisites for Bangladesh to receive Poverty Reduction Growth Facility loans.

The last BNP-led coalition government had agreed in principle to gradually privatise the state-owned banks.