Strong banking reforms needed to reduce default loans
Md. Shahidul Islam Sumon
The country’s economy has reached an extremely sensitive and complex juncture. Rather than various external economic pressures, high inflation and sluggish revenue collection, the more serious and long-term crisis has become the extreme disorder in the country’s banking sector. Years of accumulated irregularities, political influence, unplanned and weak lending, overvalued collateral, a culture of repeatedly rescheduling loans under special concessions, and a kind of invisible leniency toward intentional loan defaulters have together severely damaged the backbone of the country’s banking sector. The impact of this reality is not limited to the balance sheets of a few banks or the concerns of depositors; it is directly affecting new industrialisation, investment, employment, revenue collection and overall economic growth.
Recently, a high-level delegation from the International Monetary Fund (IMF) issued a clear warning after completing its visit. According to the organisation’s observations, increasing revenue collection, controlling inflation and cleaning up the banking sector are the three major challenges facing the macroeconomy. If strong and bold reforms cannot be implemented, the growth rate could fall to around 3.5 percent in fiscal year 2026-27 and could decline further to below 3 percent in the medium term. While the government’s announced growth target is close to 6.5 percent, such a forecast by an international organisation is a clear indication of the deep structural weaknesses accumulated within the economy.
An analysis of Bangladesh Bank’s monetary policy review data for fiscal year 2025-26 shows that at the end of the March quarter of 2026, the amount of reported defaulted loans in the banking sector stood at Tk 5,88,704 crore, accounting for 32.26 percent of total disbursed loans. In just the previous quarter, defaulted loans increased by around Tk 31,487 crore. However, the banking sector’s actual crisis is not limited to this visible amount of nearly Tk 5.9 lakh crore. Around Tk 83,479 crore has been written off outside the main ledger. Loans worth around Tk 4,46,891 crore have been rescheduled under special concessions and shown as regular. In addition, around Tk 1.77 lakh crore in loans is tied up in various projects under litigation. In other words, out of the banking sector’s total loans of Tk 18.25 lakh crore, more than Tk 11 lakh crore consists of actually risky or distressed assets, accounting for around 60 percent of total loans. This figure is extremely alarming for an emerging economy.
For a long time, banks have effectively been turned into administrative offices chasing loan recovery. Yet the primary responsibility of a bank is not merely to waste time pursuing loan recovery; its main task is to collect deposits honestly and efficiently, provide loans to qualified entrepreneurs and ensure financing for economic activities. As huge amounts of money remain tied up for years in litigation and complicated loan recovery processes, the banks’ capacity to provide effective loans is shrinking, with the country’s young and promising entrepreneurs having to bear the cost.
Considering this reality, Bangladesh Bank’s initiative to formulate the Distressed Asset Management Company Act, 2026, and the initiative to amend the Money Loan Court Act are undoubtedly timely steps. There are successful examples around the world of managing defaulted loans through asset management companies (AMCs) or loan recovery agencies. In the 1980s and 1990s, the United States took initiatives to manage distressed assets through asset management companies to deal with crises. Similarly, China, South Korea, Thailand and neighbouring India have taken initiatives to reduce non-performing loans through specialised institutions and frameworks.
In Bangladesh, two main options could be considered in the proposed structure for an asset management company. The first is the ‘asset purchase’ or ‘discount purchase’ method. Under this system, the agency would purchase loans from banks at a specified discount. For example, a defaulted loan of Tk 100 crore could be purchased for Tk 50 crore. This would enable banks to clean up their balance sheets relatively quickly and create opportunities for new lending and investment. Subsequently, the specialised institution would attempt to recover the loans through collateral restructuring, sale of assets or necessary legal procedures under its own risk, expertise and legal framework.
The second model could be a ‘commission-based service’. Under this arrangement, the bank would retain ownership of the loan while the specialised agency would handle the recovery process. The agency would receive a predetermined portion of the recovered amount as a commission. Depending on the circumstances and nature of the loans, a combination of the two models could also be considered.
However, strict oversight will be necessary to ensure that the new system does not allow any dishonest or influential group to acquire bank assets at nominal prices. One hundred percent transparency and independent oversight must be ensured at every stage of loan sales, asset valuation, tendering and recovery. The objective of reform must not simply be to shift the burden of defaulted loans from banks’ balance sheets to the private sector; rather, the real goal must be to recover the loans and ensure the highest possible value of the assets.
At the same time, it must be remembered that merely establishing a specialised institution will not make the mountain of bad loans disappear unless the judicial process is made faster and more effective. The prolonged proceedings of Money Loan Courts currently create a kind of unintended advantage for intentional loan defaulters. Taking advantage of the slow judicial process, they may get opportunities to transfer property, change ownership or launder money. Therefore, it is essential to modernise the infrastructure of Money Loan Courts, increase the number of judges and support staff, introduce digital document management and amend the necessary laws and regulations to ensure that cases are disposed of within a specified timeframe.
The widespread allegations of irregularities in collateral valuation at the time of loan disbursement must also be stopped. If opportunities are created to obtain loans by showing collateral values several times higher than their market prices, the concerned valuation firms and bank officials must also be subjected to strict accountability. If evidence of corruption or fraud is found, not only the borrower but also dishonest bankers and the relevant valuation firms must face punishment under the law.
Throughout this reform process, one fundamental principle must be strictly followed: business losses and deliberate fraud are not the same thing. If an entrepreneur temporarily fails because of an international recession, rising raw material prices, market contraction or another unavoidable business shock, they should be given opportunities for restructuring, rescheduling or sufficient time to survive. But those who took loans from banks with the intention of siphoning off the money from the outset through transferring funds abroad, submitting forged documents or abusing political power should be identified as ‘intentional defaulters’ and subjected to strict action.
In contrast, honest borrowers who have regularly paid their loan instalments should be encouraged through special incentives. Initiatives such as preferential interest rates, faster loan approvals and increased credit facilities could increase businesses’ willingness to maintain financial discipline. This would also help create an environment of mutual trust between banks and borrowers.
Above all, any initiative is bound to fail without establishing overall governance in the banking sector. Ending politically influenced lending, eliminating conflicts of interest on banks’ boards of directors and ensuring the central bank’s independent and effective supervisory powers are now demands of the time. The state has a responsibility to ensure that depositors’ hard-earned money does not become a tool for increasing the personal wealth of any particular group or vested interest.
Increasing revenue collection, controlling inflation and reforming the banking sector are deeply interconnected. If the banking sector is weak, investment will decline; if investment declines, employment and production will be hampered; and if production falls, the government’s revenue collection will ultimately decline as well. Therefore, the banking sector crisis is not an isolated financial problem; it creates multidimensional pressure on the overall economy. For this reason, the IMF’s stern message should not be viewed merely as a source of fear or pressure. Rather, it should be seen as an opportunity to restore discipline to the economy by addressing long-standing financial irregularities and structural weaknesses. However, the reforms must be realistic, transparent, accountable and long-term.
The author is an economic analyst, columnist and researcher on the Chittagong Hill Tracts.
