Bangladesh Proposes New Law Allowing Private Firms to Recover Defaulted Loans

Dhaka, July 16, 2026 — The Bangladesh government has moved to enact new legislation that would allow private companies to purchase defaulted loans from banks, recover them, and sell pledged collateral. The proposed Distressed Asset Management Act (DAMA) aims to address one of the country's most pressing financial sector challenges — a staggering Tk 10.91 trillion in distressed loans at the end of December 2025, accounting for nearly 60 percent of all disbursed loans. 📊

🏛️ The Financial Institutions Division under the Ministry of Finance has initiated the legislative process and published the draft law to seek public feedback.

💰 The Scale of the Problem — Tk 10.91 Trillion in Distressed Loans

According to the Bangladesh Bank Financial Stability Report 2025, total distressed loans — including defaulted, written-off, rescheduled, and court-stayed loans — stood at approximately Tk 10.91 trillion at the end of December 2025, accounting for nearly 60 percent of all disbursed loans. 📈

📋 Categories of distressed loans:

• ❌ Defaulted loans — Borrowers stopped repaying
• 📝 Written-off loans — Banks removed from balance sheet but still owed
• 📅 Rescheduled loans — Restructured but still at risk
• ⚖️ Court-stayed loans — Recovery blocked by legal injunctions

⚠️ These distressed loans have weakened banks' balance sheets and reduced their capacity to extend new credit, placing additional pressure on the entire financial system.

📋 What the Proposed Law Would Do

Under the proposed DAMA law, specialised private companies will be established to manage banks' non-performing loans (NPLs). These Distressed Asset Management Companies (DAMCs) will be authorised to:

• 💰 Purchase defaulted loans — Buy NPLs from banks
• 🔧 Restructure loans — Modify terms to make repayment feasible
• 🏢 Reorganise borrowers' businesses — Turn around struggling companies
• 🤝 Attract new investors — Bring in fresh capital
• 📊 Convert debt into equity — Take ownership stake in lieu of debt
• 🏭 Sell or lease all or part of a business — Maximise recovery value

🏗️ How the System Would Work

The draft law proposes an entirely new framework for managing defaulted loans:

🏛️ Distressed Asset Management Unit (DAMU)

• 📍 Established under Bangladesh Bank supervision — Independent legal entity
• ⚖️ Exercises statutory powers independently — Not subject to political interference
• 📋 Authority: Acquire distressed assets, supervise licensed entities, issue licences, publish regulatory directives, impose financial penalties, revoke licences
• 🚨 Distressed Asset Enforcement Taskforce — Can be established if required
• 📊 Central database of distressed assets — Maintain and analyse information

🏭 Distressed Asset Management Companies (DAMCs)

• 🏛️ Licensed by the DAMU — Private-sector entities
• 💰 Purchase defaulted loans from banks — Assume responsibility for recovery
• 🔧 Manage collateral — Sell underlying assets if necessary
• 📋 Stringent requirements — Must register under Companies Act, maintain prescribed capital, appoint qualified directors and CEOs

🤝 Loan Servicer Companies

• 📋 Support loan recovery and restructuring — Specialised service providers
• 🏦 Work with DAMCs — Help manage the day-to-day of distressed assets

🌍 International Precedent — Other Countries Have Done This

Many countries have adopted the asset management company model to address banking sector crises. Bangladesh is now preparing to follow the same approach. 🌏

📋 Notable international examples:

• 🇨🇳 China — Four major asset management companies established in 1999 to absorb NPLs from state banks
• 🇰🇷 South Korea — Korea Asset Management Corporation (KAMCO) played key role in 1997 Asian financial crisis recovery
• 🇮🇳 India — Asset Reconstruction Companies (ARCs) under SARFAESI Act since 2002
• 🇮🇩 Indonesia — IBRA established after 1997 crisis to manage distressed assets
• 🇹🇭 Thailand — Sukhumvit Asset Management after 1997 crisis

📊 Current Recovery System — Why It's Failing

At present, banks attempt to recover defaulted loans through two main channels:

• 🏦 Direct recovery by banks — Negotiation, restructuring, collateral sale
• ⚖️ Artha Rin Adalat — Specialised money loan courts

⚠️ Both channels have significant limitations:

• ⏰ Court proceedings take years — Cases drag on indefinitely
• 💰 Asset disposal processes are lengthy — Collateral can't be sold quickly
• 📋 Legal complexities — Borrowers use injunctions to block recovery
• 🚫 Weak recovery mechanisms — Banks lack specialised expertise
• 💸 Capital tied up — Funds stuck in NPLs can't be lent to productive sectors

💬 Government's View

Nazma Mobarek, Secretary of the Financial Institutions Division, told Prothom Alo:

💬 "Our experience has been that draft laws generally receive very few comments. We hope the proposed DAMA law will attract meaningful feedback."

📋 This acknowledges that public consultation on draft laws in Bangladesh has historically been weak, and the government is actively encouraging more substantive feedback on this critical legislation.

🔍 What This Means for Bangladesh's Banking Sector

If enacted and implemented effectively, the DAMA law could:

• 🏦 Clean up bank balance sheets — Move NPLs off banks' books
• 💰 Restore credit flow — Banks can lend to productive sectors again
• 📈 Improve financial stability — Reduce systemic risk
• 🏭 Enable business restructuring — Save viable companies from liquidation
• 💵 Maximise recovery value — Professional asset managers can extract more value
• 📊 Create a market for distressed assets — Price discovery for NPLs
• 🌍 Attract foreign investment — International distressed debt funds could enter Bangladesh

⚠️ Risks and Challenges

While the DAMA law is a positive step, several risks and challenges need to be managed:

• 🏛️ Regulatory capacity — DAMU needs skilled staff to supervise licensed companies
• 💰 Capital requirements — DAMCs need significant capital to purchase NPLs
• 📋 Pricing transparency — How will NPLs be valued when sold to DAMCs?
• ⚖️ Legal framework — Existing laws (Artha Rin Adalat, Bankruptcy Act) may need updates
• 🤝 Political interference — Must ensure DAMCs operate independently
• 👥 Borrower protection — Prevent harassment of genuine borrowers
• 📊 Transparency — Public reporting on NPL sales and recovery rates

🎯 What's Next

The draft law is now open for public feedback. The legislative process will involve:

1. 📋 Public consultation — Stakeholders submit feedback on the draft
2. 📝 Revision — Financial Institutions Division incorporates feedback
3. 🏛️ Cabinet approval — Final draft goes to the cabinet
4. 📅 Parliament passage — Law enacted by parliament
5. ⚙️ Implementation — DAMU established, DAMCs licensed
6. 📊 First NPL sales — Banks begin selling distressed loans

For Bangladesh's banking sector — which has been weighed down by NPLs for years — the DAMA law represents the most significant reform attempt in decades. If implemented well, it could unlock billions of taka in stuck capital and restore the banking system's ability to finance the country's economic growth. 🚀