Private firms to buy bad loans, take over companies

The government has proposed a new law that would allow private firms to buy bad loans from banks, seize mortgaged assets and take control of indebted companies.

The proposed law, titled the “Distressed Asset Management Act, 2026”, was published yesterday on the website of the Financial Institutions Division for public feedback.

The draft seeks to establish a specialised ecosystem of regulators, private asset managers and recovery firms that can buy, manage and recover the country’s massive stock of bad loans more aggressively and with fewer legal issues than under the current system.

Its main objective is to create a formal market for buying and selling bad loans. The law also aims to attract investors and strengthen the financial system.

As of December last year, distressed loans in the country’s banking sector stood at Tk 10.91 lakh crore, accounting for about 60 percent of total outstanding loans of Tk 18.21 lakh crore.

Loans that are at a high risk of default, or where the borrower is already experiencing serious repayment difficulties, are termed distressed loans. These are calculated by combining defaulted loans, written-off loans, unclassified rescheduled loans, and loans under stay order.

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.

The draft proposes the creation of a new independent regulator, the Distressed Asset Management Unit (DAMU), under the oversight of the Bangladesh Bank.

The unit would be led by a government-appointed chief holding the rank of a BB deputy governor. DAMU would issue licences and supervise companies involved in recovering bad loans.

It would also have the authority to create a special enforcement body called the Distressed Asset Enforcement Taskforce (DAET).

As per the draft, the DAMU chief would serve a single three-year term and could remain in office until the age of 65.

As per the draft, DAMU will issue licences for private-sector firms that would purchase bad loans directly from banks and non-bank financial institutions. These firms will be called Distressed Asset Management Companies (DAMCs).

At least 20 percent of the board members of these companies would have to be independent directors.

DAMCs would be able to buy stressed assets from banks and financial institutions on a clean-cash basis through mutual agreements. Separate trusts could then be established to manage those assets or raise funds from investors.

The trusts would safeguard the assets even if the parent company faced financial difficulties. DAMCs could raise funds from investors at home and abroad, but would not be allowed to borrow from banks or financial institutions.

To professionalise the recovery process, banks and DAMCs could hire specialised Loan Servicer Companies (LSCs). These specialised firms would handle borrower communications, debt restructuring, asset tracing and legal procedures.

However, LSCs would be barred from accepting public deposits or using coercive or unlawful methods to recover debts. DAMU would enforce a strict code of conduct for these entities.

One of the most significant changes proposed in the draft is that DAMCs would be able to seize and sell mortgaged property without first obtaining a court order.

They would also be allowed to take control of companies with large distressed loans and appoint administrators to run them. Ownership would be returned to the original owners if the companies later repaid their debts.

The law would bar habitual defaulters and their associates from owning, managing or participating in recovery companies and agencies. They would also be barred from purchasing assets sold under the law.

Violations of DAMC licensing conditions could result in administrative fines ranging from Tk 10 lakh to Tk 1 crore.

Operating without a licence or using a false identity would be a criminal offence punishable by up to seven years in prison, a Tk 1 crore fine, or both.

Anyone providing false information to obtain a licence could face up to 10 years in prison, according to the draft.