Bangladesh Tackles Trillions in Stalled Bank Loans with Bold New Legal Framework
Bangladesh’s banking system faces a massive challenge: Tk 10.91 trillion in troubled loans by last December. This figure, nearly 60 percent of all disbursed loans, weakens banks, limits new lending, and pressures the entire financial system. Legal complexities often tie up funds for years.
To fix this, the government proposes the Distressed Asset Management Act (DAMA). This new law aims to create a specialized market for problematic assets. It will allow private companies to buy defaulted loans directly from banks. These companies will then recover the money, restructure loans, or sell collateral. A draft law is open for public feedback.
Under DAMA, a Distressed Asset Management Unit (DAMU) will be established, overseen by Bangladesh Bank. This unit will license private Distressed Asset Management Companies (DAMCs) to manage troubled assets. Loan Servicer Companies will also assist in recovery efforts, such as negotiating with borrowers.
The DAMU will operate with significant independence, supervising licensed entities, setting regulations, imposing fines, and maintaining a central database. This new framework offers a structured alternative to banks currently struggling with recoveries.
DAMCs will have strict requirements, including registration, capital, and experienced directors. They will not just purchase loans but also restructure businesses, attract investors, and convert debt into equity. This aims to recover loans while keeping businesses operational. Companies can raise capital from local and foreign investors, even through securitization, but cannot borrow from banks for these operations.
Experts believe the DAMA law could create a vital market for distressed loans. This would allow banks to clean their balance sheets and boost capacity for new credit, potentially attracting foreign investment. Past asset management companies failed due to legal loopholes, which this new law aims to fix.
