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Try these changes...

...
counter=0
max=${#char }

while [ $counter -lt $pwd_number ]
do
out=""
for i in `seq 1 $pwd_length`
do
let rand=${RANDOM}%${max}
...

The custom login shell in /etc/passwd suits for a kiosk system where the user may not break out to the shell prompt.
For an initial script ending in a shell prompt /etc/profile is the right place....

You can designate any executable as login shell for a user. Create a script presenting and executing these functions you talked about, then put it in "/etc/passwd" as login shell for this user. It...