Donors had proposed the formation of an Asset Management Company to address the crisis of the distressed bank assets more than a quarter of a century ago. Although Bangladesh refused to take the suggestion, they now have no other option but to accept a resolution and initiate a new law titled ‘Distressed Asset Management Act, 2026.’ Its main objective is to create a regulator namely the Distressed Asset Management Unit (DAMU) at Bangladesh Bank, and a Distressed Recovery Programme (DARP). DAMU will be the regulator of the distressed asset market, which will be a formal market for buying and selling bad loans. As per the draft, DAMU will issue licences for private-sector companies that would purchase bad loans directly from banks and non-bank financial institutions. These firms will be called Distressed Asset Management Companies (DAMCs).
Distressed assets are loans from financial institutions that are in default, at high risk of default, or where the borrower is already experiencing serious repayment difficulties; these are termed distressed loans. It can be calculated by combining defaulted loans, written-off loans, unclassified rescheduled loans, and loans under stay order. Distressed financial institutions’ assets can slow the economy, even prevent economic recovery, and increase unemployment, creating a vicious circle that is difficult to break.
The move comes as the World Bank, the International Monetary Fund (IMF) and the Asian Development Bank (ADB) push for stronger capacity to manage stress in the banking sector. These donors have recommended the complete disclosure of data regarding distressed assets – including defaulted loans – held by the country’s banks. Additionally, they have suggested that inspection reports on the financial health of banks, conducted by the Bangladesh Bank, should be made available to customers. Distressed loans in the Bangladesh Bank system have soared to a record Tk 10.91 lakh crore, accounting for nearly 60% of all outstanding loans. An observation shows that the total distressed portfolio is calculated by adding several high-risk categories, such as Classified Defaulted Loans (Tk5.57 lakh crore), Unclassified Rescheduled Loans (Tk2.68 lakh crore), Loans Under Stay Orders (Tk1.82 lakh crore), and Written-off Loans (Tk83,479 crore), together. The solution is to recover distressed assets from failed banks and other financial institutions for improving assets under management, establish the time frame for asset improvement and disposal, allow the potential option of new financing if this is value-accretive, etc.
A well-prepared and conducted asset sale process is essential to maximise recovery values. The primary buyer is Distressed Asset Management Company (DAMC). After reorganising and restructuring the assets, the general buyers from home and abroad shall buy the assets to run the companies. The key general principles of sale include: appropriate portfolio structuring of assets for sale, proper marketing to broaden the investor base, detailed information of assets sold to minimise ‘price gap’, and transparent and efficient sales platforms. Transparent valuation processes and disclosure of maximum information to investors regarding assets facilitate price discovery. All the stakeholders are part of the ‘distressed asset market’. Robust distressed assets markets can facilitate a return to economic growth and financial stability. In many jurisdictions, central banks have the bank resolution and liquidation mandate and manage distressed asset resolution in administrative or court-based processes. Bangladesh is going to have such a resolution for the same purpose. This is crucial to attracting investors in the distressed assets market. Cross-border legal and tax issues also play important roles.
Appropriate laws and regulations that favour smooth transactions and loan transfers allow investors to enforce their claims and collateral efficiently and provide mechanisms for both out-of-court restructuring and efficient in-court insolvency processes. A well-developed legal and institutional regime is key to maintaining an acceptable risk level, allowing distressed assets markets to develop. It also aims to attract investors and strengthen the financial system. When investors consider entering a new market, they evaluate and analyse some preconditions, the key ones being the market size, the macroeconomic environment, the legal and regulatory framework, the quality of information, as well as the servicing capacity and the investor base. It will allow banks to dispose of their non-productive assets and resume lending, enable borrowers to regain access to the financial system, and create an environment for the successful restructuring of viable companies. This, however, requires compromises among stakeholders and collaboration between the public and private sectors.
This programme is an enabling measure for dealing with insolvency, enforcement, and the ability to achieve out-of-court workouts (OCW) is essential. DARP’s strategy should build an essential servicing infrastructure required across markets and deploy capital, including capital mobilised from third-party investors, to acquire and resolve distressed assets. The draft law would allow Distressed Asset Management Companies (DAMCs) from home and abroad to buy bad loans from banks, seize mortgaged assets and take control of indebted companies.
A well-developed legal and institutional regime is key to maintaining an acceptable risk level, allowing distressed assets markets to develop. Enabling measures for dealing with insolvency, enforcement, and the ability to achieve out-of-court workouts (OCW) are essential. Laws and regulations that favour smooth transactions and loan transfers allow investors to enforce their claims and collateral efficiently and provide mechanisms for both out-of-court restructuring and efficient in-court insolvency processes. This is crucial to attracting investors in the distressed assets market. Cross-border legal and tax issues also play important roles.
Developing a distressed asset market requires the interaction of multiple factors and stakeholders, sometimes with opposing interests. Governments play a key role in market development by ensuring that laws and regulations permit the development of the market, including, among other initiatives, the transfer of credit to specialised investors, the development of credit registries, the improvement of enforcement and insolvency legislation, and the establishment of electronic collateral registries.
Distressed Asset Management Unit (DAMU) can ensure that a sound legal and regulatory environment exists, establishing appropriate rules regulating the transfer of assets, debt enforcement and collection, and sufficient and timely provisioning by financial institutions. DAMU can also encourage the development of adequate market infrastructure, setting up public credit and collateral registries and facilitating access to credit data, legal records, and financial information by investors. They should also establish a level playing field that encourages private investors, foreign and domestic, to participate in the market under equal conditions, efficiently and transparently. Reforms are likely to overlap ministerial responsibility, requiring coordinated cooperation among stakeholders.
The ‘Distressed Asset Management Act, 2026’ law is not sufficient for a distressed asset market. Many laws and rules should be aligned for the establishment of a market. DAMU should be a traditional administrative authority, but a dynamic facilitator of a distressed asset market. Transfer of ownership of a distressed asset may create some legal complications. This is a new concept for Bangladesh. The regulators and government have a long way to go to prepare for reforms of some more related laws and regulations.
The views expressed in this article is solely those of the author
The writer is the CEO, Bangla Chemical & Legal Economist. E-mail: [email protected]
