Private firms to recover defaulted loans under proposed new law

The government is set to introduce a new law that will allow private companies to purchase defaulted loans, recover them and, where necessary, sell the pledged collateral.

Under the proposed Distressed Asset Management Act (DAMA), specialised private companies will be established to manage banks’ non-performing loans.

The Financial Institutions Division under the Ministry of Finance has initiated the legislative process incorporating these provisions. It has already published the draft law to seek public feedback.

A significant volume of funds has remained tied up for years due to court proceedings, lengthy asset disposal processes, legal complexities and weak recovery mechanisms.

According to people concerned, these distressed loans have weakened banks’ balance sheets. Moreover, the large stock of defaulted loans has reduced banks’ capacity to extend new credit, placing additional pressure on the entire financial system.

Taking these realities into account, the Financial Institutions Division has moved to enact the new legislation.

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 last year, accounting for nearly 60 per cent of all disbursed loans.

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."

The draft law proposes an entirely new framework for managing defaulted loans. Under the framework, a Distressed Asset Management Unit will be established, which will be supervised by the Bangladesh Bank.

Licensed by the unit, private-sector Distressed Asset Management Companies will undertake the management of distressed assets. In addition, Loan Servicer Companies will support loan recovery and restructuring.

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

At present, banks either attempt to recover defaulted loans themselves or rely on the Artha Rin Adalat. Under the proposed system, banks will be able to sell defaulted loans to licensed companies.

Those companies will then assume responsibility for recovering or restructuring the loans, managing the collateral and, where necessary, selling the underlying assets.

In effect, the law will create a specialised market for the management of distressed assets.

The draft legislation also proposes establishing the Distressed Asset Management Unit as an independent legal entity. Although it will operate administratively under Bangladesh Bank, it will exercise its statutory powers independently.

The unit will have the authority to acquire distressed assets, supervise licensed entities, issue licences, publish regulatory directives, impose financial penalties and revoke licences where necessary. It will also be empowered to establish a Distressed Asset Enforcement Taskforce if required.

In addition to serving as the regulator, the unit will also operate the central database of distressed assets. It will maintain and analyse information on the volume of defaulted loans held by each bank, the status of individual assets and the performance of licensed companies.

At the same time, the unit will provide policy recommendations to both the government and Bangladesh Bank.

The proposed law sets out stringent requirements for establishing a Distressed Asset Management Company.

Each company must register under the Companies Act, maintain the prescribed capital and appoint directors and chief executives with experience in banking, economics, law or asset recovery.

The draft also proposes that at least 20 per cent of the board members should serve as independent directors.

The draft states that Distressed Asset Management Companies will do more than purchase defaulted loans.

They will also be authorised to restructure loans, reorganise borrowers' businesses, attract new investors, convert debt into equity and sell or lease all or part of a business.

In other words, the framework will not rely solely on selling collateral; it will also allow companies to recover loans while keeping businesses operational.

The proposed legislation also introduces the concept of Loan Servicer Companies.

These companies will negotiate with borrowers, facilitate loan rescheduling and settlements, collect and assess asset information, trace assets and assist in court proceedings.

However, they will not be permitted to file lawsuits in their own name, accept deposits from the public or engage in any form of coercive or unlawful debt recovery.

Tareq Refat Ullah Khan, managing director of BRAC Bank, told Prothom Alo that several issues require particular attention to ensure the proposed DAMA framework is both effective and market-oriented.

"First, the government should establish an effective business framework that allows Asset Management Companies (AMCs) to purchase distressed loans at market-determined discounted prices and generate value through restructuring, recovery or asset management before selling them at a higher price."

"Second, the government must remove the existing legal and procedural barriers affecting the purchase, sale, transfer and enforcement of distressed loans and the associated rights. Otherwise, these obstacles will slow transactions, reduce efficiency and prevent the development of an effective secondary market."

"Third, the law should clearly provide for the seamless transfer of collateral, security interests and related legal rights held by banks to Asset Management Companies. At the same time, it should ensure clear legal protection so that AMCs can subsequently transfer or enforce those collateral assets and related rights in favour of buyers without facing legal complications."

The draft law proposes allowing securitisation, enabling financial institutions to pool multiple defaulted loans and raise funds by issuing bonds or other financial securities backed by those assets.

According to the draft. companies will be able to raise capital from domestic and foreign investors, joint ventures and various investment funds. They will also be allowed to establish distressed asset management funds through agreements with foreign investors.

However, the draft does not permit companies to finance these operations by borrowing from banks or financial institutions.

The draft states that the Distressed Asset Management Unit will have the authority to request information, documents and financial records from licensed companies at any time.

Where necessary, it may conduct audits, inspections or investigations. The unit will also have the authority to impose financial penalties, take administrative action, or suspend or revoke licences if a company breaches the law or the conditions of its licence.

However, before taking any punitive action, it must give the concerned company an opportunity to present its defence.

According to banking sector analysts, effective implementation of the proposed law could create a specialised market for distressed loans.

This would enable banks to remove long-standing non-performing assets from their balance sheets and strengthen their capacity to extend new credit.

The sector could also attract interest from foreign investors and international asset management firms.

Recalling his tenure as managing director of Agrani Bank from 2004 to 2010, Syed Abu Naser Bukhtear Ahmed, the current chairman of Agrani Bank, told Prothom Alo on Tuesday, "There were two or three asset management companies in the past. They sometimes resorted to publicly shaming defaulting borrowers and, at other times, sent transgender individuals to pressure them. Because of legal loopholes, those companies could not operate effectively."

Syed Abu Naser Bukhtear Ahmed added, "I welcome the initiative to introduce the Distressed Asset Management Act. I hope it will address the weaknesses that existed in the past."