Bangladesh Bank has taken a new initiative to boost the recovery of defaulted loans for banks and financial institutions.
From now on, the central bank will appoint specialized mediating institutions under an Alternative Dispute Resolution (ADR) framework. These institutions will form multiple panels to work on recovering outstanding loans.
Political or influential individuals cannot be part of these mediator panels.
Furthermore, persons dismissed from jobs or professions due to embezzlement, corruption, fraud, moral turpitude, or similar severe irregularities, as well as loan defaulters of any bank or finance company, are excluded.
These institutions will receive a set commission rate based on recovered loans, with their overall activities strictly monitored by Bangladesh Bank.
On Thursday, Bangladesh Bank issued a circular establishing the guidelines for "Appointment and Operation of Mediating Institutions under Alternative Dispute Resolution."
The guidelines have been sent to the chief executives of all commercial banks and finance companies nationwide.
According to the policy, banks and financial institutions can now utilize these enlisted mediating firms for defaulted loans they failed to recover through conventional processes.
These firms will facilitate compromises between borrowers and lenders to resolve disputes and recover loans.
Bangladesh Bank sources noted that the continuous accumulation of defaulted loans has placed significant strain on the banking sector, negatively impacting liquidity, capital, and financial capacity.
Simultaneously, the large volume of debt recovery lawsuits has burdened the judiciary.
Consequently, this initiative seeks to establish a faster, effective recovery path outside court reliance.
How mediating firms will operate
The policy dictates that listed mediating firms will receive data regarding unrecovered or defaulted loans from banks and financial institutions.
They will then contact borrowers to initiate dispute resolution and loan recovery.
Firms must strictly maintain the confidentiality of the borrower's financial and personal data.
Bangladesh Bank will take action against any firm or associated individual that breaches confidentiality terms.
To be enlisted, entities must apply to Bangladesh Bank and pledge to safeguard customer data confidentiality.
If a firm conceals a conflict of interest, breaches confidentiality, or violates major policy provisions, Bangladesh Bank may suspend its listing for a specified duration following a show-cause notice.
Removal for severe irregularities
Bangladesh Bank can delist any firm involved in grave irregularities, corruption, fraud, or misconduct, or one that consistently fails to maintain professional service standards.
Action can also be taken for disobeying central bank directives, failing to resolve reasons for suspension, or engaging in acts that damage the firm's credibility, neutrality, or reputation.
However, firms will receive a reasonable opportunity to show cause before delisting. Bangladesh Bank can issue necessary directives—including transferring ongoing recovery efforts to another enlisted firm—to ensure loan recovery remains uninterrupted if a firm is suspended or delisted.
Panels require 10 years of experience
The guidelines detail specific qualifications for panel members. Individuals serving on panels under existing laws must possess at least 10 years of experience in banking, finance, law, accounting, auditing, or the judiciary.
Individuals dismissed for embezzlement, corruption, fraud, or moral turpitude, as well as loan defaulters and politically influential figures, are strictly barred.
This aims to guarantee professional expertise, neutrality, and acceptability among panel members.
Bangladesh Bank will directly supervise the activities of mediating firms, which must submit detailed annual performance reports to the central bank.
The policy reaffirms that upon receiving loan recovery assignments, firms must maintain strict confidentiality of all loan and borrower data, prohibiting disclosure to unauthorized third parties.
Aiming for rapid recovery and fewer lawsuits
Defaulted loans have long been a major challenge for the banking sector. Conventional legal processes are time-consuming, tying up bank funds and swelling court dockets.
ADR aims to speed up fund collection by fostering consensus between lenders and borrowers, which the central bank hopes will accelerate recovery rates while reducing long-term litigation.
Mediation and ADR mechanisms are already active in various global markets, including India, Pakistan, and Nepal.
While Bangladesh previously utilized mediation on a limited scale, this new central bank policy establishes a structured and regulated framework.
Industry observers believe successful execution could rapidly clear a portion of long-standing default debts, enhance bank financial strength, and ease judicial burdens.