The banking sector in any country is the barometer for judging the state of economic development. It applies to all economies. With the direct involvement of political personalities in the management of the economy during the last two decades, the Banking sector of Bangladesh is now in such a situation that the sector needs a paradigm shift to keep the economy moving, which again needs a vibrant banking sector.
At present, the sector is in need of proper attention without further wastage of time. Understanding the importance, the Ministry of Finance took an initiative to address the present situation and proposed a new Law known as the Distress Asset Management Act 2026 (DAMA 2026). This indicates the seriousness of the present Government in addressing the situation.
For the last 10 years, the Government and some multilateral agencies, including the World Bank, have recognised the serious status of the banking sector and primarily opined that this gigantic task may be assigned to a new set of corporates called Asset management companies.
The above companies will be formed under the Companies Act 1994 and will purchase the distressed assets from the financial institutions and start operations to recover the amount, or will facilitate the borrower to repay the money through some positive measures like arranging the required amount of working capital to make the closed companies operational; or through change of management, etc. Based on this understanding, the proposed DAMA 26 has been drafted and placed for Public Opinion.
Moreover, non- performing loans in the banking sector have been created mostly through political influence and are not easily recoverable. Therefore, this needs a deeper and insightful review of the problem of the sector and requires painful steps to be taken to bring the sector to a certain acceptable level.
The Banking sector of the country has been facing many identifiable problems. The Balance Sheets of the banking companies in Bangladesh are not acceptable to national and international communities in view of an unthinkable level of NPL or stressed assets. This non-acceptability has got high impact and cost nationally and internationally. For face-saving, the central bank is reluctantly allowing the banks to defer the losses as forbearance and to publish the balance sheets with profit or positive capital.
Since most of the banks are listed on the stock exchanges, and a significant portion of the market capitalisation in Banking stock BSEC is also in favour of showing profit for paying dividends. The central bank is now serious about banks recovering NPLs and even allowing the banks to exempt the clients from paying any interest in exchange for paying the original principal amount. Bankers are reluctant to provide finance in the private sector for fear of losing the investment and are interested in investing in government securities.
The situation has started deteriorating since 1996, when the then Finance Minister opined that the bankers are miser and do not provide long-term loans to the private sector as required. That has fueled the situation, as the banking sector provides funds to the private sector, and most of the long-term loans have defaulted, which crippled the sector.
The situation started to worsen when private sector banks were allowed to have more family-based directors who started a loan exchange programme that is taking loans from one bank, allowing the directors of that bank to take loans from their bank.
Allowing the banking sector to provide long term project loans should be stopped. Banks should be allowed to provide only a portion of the working capital loan. The balance portion should be collected from the capital market through commercial papers and short-term market products. Banks should be allowed to keep stress asset maximum of 15% to 20% of stressed assets initially, with 150% provisional coverage.
The balance loans are to be sold out at a negotiated price under a certain mechanism as stated in this article. In the process, we must keep in mind that the balance sheet of the banks should not be allowed to shrink abruptly in the process of stressed asset removal. The credit rating of the banks must be kept high and at an acceptable level of investment to attract stakeholders and also to keep the parameter of the balance sheet acceptable to the international community. The Balance sheet of the banks must be clean, transparent, and acceptable for a good credit rating.
The status as a limited company is not superior to that of any bank, especially in handling these banking issues, such as regulatory limitations on collecting bad loans, legal flaws in the process of documentation, etc.; its weaker regulatory status compared to banks operating under the Banking Companies Act.
The main objective of private sector AMCs will be to earn some profit, which requires passing through a strict process of regulatory compliance and earning profit by investing huge funds in junk loans (NPLS) will be extremely difficult. In view of the above, the Regulator may not get the required applications for licensing. For example, if no required number of AMC applications are received, what would be the function of the huge regulatory structure DMAU?
At present, the banking companies have more power and have the best legal footing to handle the issues compared to an Asset Management Company. However, the existing banks are unable to handle this issue for its management style, employee morale, links with political parties or the strong footing of many defaulted clients linked to political parties. The AMCs will not be interested in taking up this type of clients, which occupy a significant portion of the stress asset in the sector.
The AMCs will need huge funds to invest in cash to purchase the distressed assets in cash as specified in the proposed Act. This may not be possible for them to raise and manage. These types of AMCs or the Trusts created by them will not carry any acceptable good rating both nationally and internationally, and as such, the receivable by the banks against distressed asset sale will not be beneficial for the banks to make the balance sheet healthy.
Transfer of assets to the private sector limited companies and their subsequent recovery – the process will not be smooth for collection. The AMCs will not get funds from the banking institutions; hence, it will be difficult for them to invest, especially with a tax clean certificate. The AMCs will not be able to go to the capital market for funds at the initial stage in view of many regulatory restrictions and weak franchise value at the initial stage.
The government at present needs to apply a PRO-ACTIVE APPROACH to resolve the crying need of the sector, but the proposed DMAU with a RE-ACTIVE and Controlling approach to the business of AMCs will not bring any positive result, in my opinion.
The DAMA will create another top-heavy bureaucratic management structure with three layers of administration with large number of filtering stages such as establishment of DAMA Unit, licensing of new breed of companies called Distress Asset Management Companies needing registration and licensing, formation of Trusts in the process of taking over the distress assets from the Banks/ Financial Institutions and appointment of loan servicer company to recover money from the defaulted clients.
At the end of the day, recovery of money will remain with certain companies whose legal status will be weaker than the bank. The procedure will be extremely slow with many structural limitations. Moreover, the AMCs are bound to achieve the target of the Government, and they will not work unless the business is profitable.
The proposed Asset Management Companies (AMCs) may face significant challenges in purchasing distressed assets because they would be required to acquire such assets on a cash basis without financial assistance from banks. Mobilising sufficient cash to purchase non-performing or distressed loans, followed by a potentially long recovery period and cash-conversion cycle, could create a major bottleneck.
This would require AMCs to maintain substantial tax-paid paid-up capital, while generating sufficient income to sustain their operations could prove extremely difficult. Moreover, although the distress-asset-selling banks may transfer the rights and securities attached to the assets to the AMCs, the AMCs may not enjoy legal facilities equivalent to those available to banks operating under the Banking Companies Act. This raises serious concerns about their ability to operate successfully and sustainably.
Another major concern is that AMCs may often need to provide working capital to revive businesses associated with distressed assets. Without access to banking support, it would be difficult for them to provide such financing. Similarly, it may be difficult for banks to sell distressed assets to AMCs entirely on a cash basis. To facilitate the reduction of non-performing loans (NPLs), banks may need to sell such assets on credit, backed by appropriate guarantees.
However, such an arrangement is not provided for in the proposed framework. Furthermore, if banks hold receivables from AMCs without adequate credit support, the quality and rating of those receivables could adversely affect the banks’ balance sheets.
Given the grave condition of the banking sector and the urgent need to reduce NPLs to an acceptable level, perhaps around 10% to 15%, a substantial volume of distressed assets at different levels of risk will need to be removed from banks’ balance sheets. This will require AMCs to mobilise enormous amounts of cash. Although AMCs could eventually raise funds from the capital market through various financial products, such activities require substantial franchise value, market credibility and liquidity strength, which newly established AMCs may not possess in the short term.
In addition, private-sector AMCs will primarily operate with a profit-making objective and may not necessarily have the mandate or willingness to undertake the broader national responsibility of cleaning up the banking sector. Therefore, relying solely on private AMCs may not adequately address the systemic problem for which the proposed DAMA 2026 framework is intended.
Against this backdrop, it is proposed that a single institution, preferably a new bank, be established to take over and process stressed assets from the banking sector. This institution, tentatively called the Stress Asset Bank (SAB), could purchase stressed assets from existing banks and financial institutions at negotiated prices. It could preferably be established as a Shariah-based bank with a broad mandate to accommodate stressed assets originating from the entire banking sector.
The SAB should be capital-intensive and backed by the Government as a Government Support Entity (GSE), enabling it to achieve a high credit rating in the domestic market and an equivalent top-level sovereign-supported rating internationally.
The capital of the SAB could be contributed by the Government, existing banks and the private sector, while multilateral agencies could also be invited to participate in its equity. Where possible, a portion of the capital could be provided as donated or concessional capital by multilateral agencies supporting banking-sector reform. Existing banks could be permitted to retain stressed assets equivalent to approximately 10% to 15% of their portfolios, subject to 150% provisioning.
At the same time, commercial banks could be restricted from financing long-term projects and project loans, with their financing activities focused primarily on working capital and trade finance, with a maximum loan tenor of approximately five to seven years.
The establishment of such a bank would provide several important benefits. Bangladesh Bank would be able to monitor the institution and its progress closely without having to establish another large and potentially top-heavy structure.
The balance sheets of existing banks would be substantially cleaned up while retaining receivables from a government-supported institution. Since the SAB would carry a strong rating, receivables from it could retain comparatively strong credit quality, thereby supporting the overall credit standing of the existing banks.
The transfer of receivables from one banking institution to another would also avoid creating a new mechanism for borrowers to evade their obligations, as the underlying liability would remain within the banking system. The new bank would retain the necessary legal rights to pursue recovery of the transferred assets.
An additional major benefit would arise from the planned implementation of IFRS 9 by Bangladesh Bank from 2029. The transition from the incurred-loss model to the expected-credit-loss approach is expected to create substantial additional provisioning requirements for existing NPLs.
Transferring a significant portion of stressed assets to the SAB could therefore provide considerable relief to banks from the resulting provisioning burden.
The SAB would address different categories of NPLs through appropriate strategies. These could include written-off loans where borrowers remain identifiable but sufficient security is unavailable; loans where funds have not been diverted but businesses have become non-performing for various reasons; cases where funds have been diverted, businesses are no longer operational, but tangible securities remain available; and NPLs caused primarily by shortages of working capital or inadequate co-operation from banks.
The SAB could assess each category separately and apply suitable recovery, restructuring, revival or liquidation strategies. By collecting deposits from the market and operating as a government-supported, development-oriented bank with strong credit standing, the SAB would have greater capacity to mobilise funds and undertake the long-term process of resolving stressed assets across the banking sector.
Author is a FCMA FCS, and Executive President, Credit Rating Information and Services PLC. The views expressed in the article are solely those of the author.
