In a radical departure from traditional debt recovery, the government is preparing to launch a market-based mechanism to clean up the banking sector’s balance sheets.
Under the proposed "Distressed Asset Management Act 2026" (Dama), Bangladesh will allow licensed, private asset management companies to purchase non-performing loans (NPLs) directly from banks and recover them commercially.
The move transitions default loans from a prolonged legal and administrative burden into tradable commercial assets.
Private distressed asset managers will be empowered to buy, restructure, run, or liquidate these bad loans for profit—introducing a model successful in nations like South Korea, Malaysia, and China to combat systemic banking crises.
The initiative comes amid a severe liquidity squeeze and capital erosion in the banking sector.
With approximately 60% of all disbursed loans categorized as distressed or at risk, commercial banks have seen their lending capacities crippled.
Offloading these stagnant assets to specialized buyers is seen as a vital step to unclog the financial system.
To oversee this new financial market, a dedicated regulator—the Distressed Asset Management Unit (Damu)—will be established under the administrative umbrella of Bangladesh Bank.
Led by an official holding the rank of a deputy governor, the unit will operate with autonomous enforcement powers.
To maintain professional boundaries, the draft law introduces Loan Servicing Companies (LSCs).
These entities will act as specialized subcontractors to evaluate assets, trace borrowers, and negotiate settlements.
To prevent coercive debt-collection practices, LSCs are strictly prohibited from filing lawsuits, accepting public deposits, or using strong-arm tactics.
Extensive restructuring powers
Unlike traditional bank recovery departments, Distressed Asset Management Companies (DAMCs) will possess corporate restructuring powers designed to rehabilitate viable businesses rather than simply seizing collateral:
- Debt-to-Equity Swaps: Converting outstanding debt into corporate shares.
- Corporate Rescheduling: Restructuring repayment timelines and loan terms.
- Business Modernization: Injecting new capital, bringing in fresh investors, or leasing operations.
- Collateral Enforcement: Seizing, managing, or selling mortgaged assets.
- Trust Structures: Managing acquired assets through independent, bankruptcy-remote trusts to shield buyers from insolvency risks.
A major feature of the draft law is its sweeping definition of "associated parties."
This wide legal net aims to block the common practice of transferring defaulted corporate assets to family members or offshore holding entities.
The draft framework seeks to turn distressed debt into an attractive asset class for both local and international investors.
DAMCs can be set up by local entrepreneurs, foreign asset managers, private equity funds, credit funds, and multilateral development agencies.
The law permits securitization, the issuance of specialized high-yield bonds, and joint-investment funds to pool capital. However, to prevent conflicts of interest, companies are barred from borrowing from local banks to fund their debt-purchasing operations.
Expert analysis
Prominent economists view the policy shift as a necessary departure from failed recovery models.
"Introducing private asset management companies to purchase bad loans is a highly positive and timely reform," noted Prof Abu Ahmed, economist and former chairman of the Investment Corporation of Bangladesh (ICB).
"However, in our economic landscape, success depends entirely on neutral, uncompromising execution. If political interference blocks recoveries, even the best laws will fail to yield results."
Prof Ahmed added that given the sheer volume of NPLs, the government has virtually no choice but to deploy market-oriented recovery tools to save the financial sector.
Prof MSI Jahid of Dhaka University warned that simply establishing new companies will not yield results if politically influential defaulters remain insulated from enforcement.
MK Mujeri, an economist, believes that if assets are priced transparently and managed free of external interference, the policy will rapidly clean up bank balance sheets, boosting fresh credit flows.
The Distressed Asset Management Act 2026 could mark the beginning of a modern financial era for Bangladesh.
If implemented with transparency, clear pricing mechanisms, and strict regulatory oversight, it offers a realistic exit ramp for the banking sector's bad debt.
However, if the licensing process is captured by vested interest groups or used to park bad loans indefinitely under shell trusts, this milestone reform risks turning into a costly cover-up for historical defaults.
