Highlights
- Bangladesh’s banking sector weakened by rising bad loans and distressed assets
- Draft Act creates institutions managing, restructuring, and resolving distressed financial assets
- DAMU oversees licensing, regulation, enforcement, and distressed asset market development
- Banks could offload bad assets, strengthening balance sheets and boosting lending.
- Success depends on governance, transparency, valuation integrity, and institutional capacity.
- Strong implementation could modernise banking and improve long-term financial stability
Bangladesh’s financial system has carried a structural burden for more than a decade. Mounting non-performing loans (NPLs), non-performing assets (NPAs) and distressed investments have weakened banks and non-bank financial institutions, constrained lending and eroded confidence in the financial sector.
Regulatory tightening alone has proved insufficient. The Draft Distressed Asset Management Act, 2026 therefore marks a significant shift in approach.
Rather than treating bad loans solely as a supervisory problem, it seeks to create an institutional ecosystem for acquiring, managing, restructuring and resolving distressed assets.
If implemented well, it could become one of Bangladesh’s most consequential financial-sector reforms in decades. But ambitious legislation succeeds only when institutional design matches policy ambition.
Beyond loan recovery
The draft seeks to move Bangladesh beyond conventional loan recovery by creating a market for distressed assets.
At its centre is the proposed Distressed Asset Management Unit (DAMU), established under the administrative oversight of Bangladesh Bank. Despite its name, DAMU is not an internal unit within individual banks but the central licensing, supervisory and regulatory authority for the distressed asset ecosystem.
Licensed Distressed Asset Management Companies (DAMCs) would purchase distressed assets from banks and non-bank financial institutions, allowing them to remove these assets from their balance sheets and focus on new lending. Loan Servicer Companies (LSCs) would provide professional recovery, restructuring and litigation support, while DAMU would also establish a Distressed Asset Enforcement Taskforce (DAET) to coordinate enforcement.
Together, these institutions create a structured pathway for distressed assets to move from identification to resolution rather than remaining indefinitely on bank balance sheets.
Lessons from abroad
Bangladesh is not the first country to confront this challenge. International experience – from Malaysia’s Danaharta to India’s Asset Reconstruction Companies – shows that specialised institutions can restore financial stability when backed by strong governance and effective implementation.
Although their experiences differ, the central lesson is the same.
Distressed asset reform is not simply about recovering bad loans. It is about restoring credit discipline, strengthening financial stability and enabling banks to resume productive lending.
The draft Act broadly reflects these international lessons and, if implemented well, could deliver significant benefits. Banks would be able to transfer distressed assets, reduce provisioning burdens and strengthen their balance sheets. Professional asset managers could maximise recoveries through restructuring rather than relying solely on litigation.
A secondary market for distressed assets could also attract institutional investors, improve price discovery and increase market liquidity. Ultimately, healthier balance sheets would enable banks to redirect capital towards productive sectors instead of remaining burdened by legacy assets.
Getting the institutions right
The draft’s greatest challenge lies not in its policy direction but in its institutional architecture.
DAMU combines an exceptionally broad range of responsibilities. It will license, supervise and inspect DAMCs and Loan Servicer Companies, maintain the central distressed asset registry, issue regulations, impose administrative penalties, coordinate enforcement through DAET and advise both Bangladesh Bank and the Government on policy.
Locating DAMU within Bangladesh Bank offers clear advantages, including regulatory expertise, administrative efficiency and closer coordination. But it also concentrates an extraordinary range of powers within a single unit.
The Bangladesh Bank would effectively regulate both sides of the market – supervising the institutions selling distressed assets while, through DAMU, overseeing those buying them. This concentration of responsibilities may be appropriate during the initial phase of implementation, but it also raises important questions about governance, accountability and institutional checks and balances. As the distressed asset market evolves, stronger internal safeguards, greater transparency and a clearer separation between prudential supervision and market oversight may become necessary.
The draft Act establishes an ambitious institutional framework, but its success will depend less on the legislation itself than on how it is implemented. International experience shows that distressed asset reforms succeed only when supported by strong governance, credible valuation, institutional capacity and consistent enforcement.
Governance comes first. While the draft Act prescribes licensing standards and fit-and-proper criteria, it says relatively little about ownership structures, board composition, conflict-of-interest safeguards, disclosure requirements or public accountability for DAMCs. These are not procedural details. Distressed asset management involves significant transfers of financial value, and weak governance can undermine market confidence, invite regulatory capture and discourage private investment. Malaysia’s Danaharta became an international benchmark not simply because of its legal powers but because of its operational independence, strong governance and professional credibility.
Valuation is equally critical. Although the draft Act provides for valuation officers, it offers little guidance on valuation methodologies, oversight or dispute resolution. Yet the transfer price of distressed assets will largely determine whether the market functions effectively. If transfer prices are too high, investors will stay away; if too low, banks will resist selling assets and concerns over the transfer of public value will arise. Transparent valuation standards and credible pricing mechanisms are therefore essential.
The framework also assumes capabilities that Bangladesh is only beginning to develop, including professional loan servicers, specialist asset managers, independent valuation experts and sophisticated securitisation structures. Building these institutions will require sustained investment in human capital, regulatory expertise and market infrastructure. Without such capacity, even well-designed legislation may remain largely aspirational.
Finally, the new framework must preserve strong repayment incentives. Although the draft Act provides no explicit government guarantee for distressed assets acquired by DAMCs, its provisions on capitalisation and risk allocation leave open questions about potential public sector exposure. More importantly, borrowers must never perceive the transfer of distressed assets as an easier path to debt forgiveness. A distressed asset market should strengthen credit discipline, not weaken it. That will require consistent enforcement, commercial decision-making and insulation from political influence.
Implementation matters
The draft Act is among the most ambitious financial-sector reforms proposed in Bangladesh in recent years. It introduces modern mechanisms – including specialised distressed asset management, professional loan servicing and securitisation – that are well established internationally but largely absent from Bangladesh’s current legal framework.
The direction of reform is both timely and necessary. Its success, however, will depend less on the legislation than on the institutions that implement it. Governance, accountability, valuation integrity and operational capacity will determine whether this initiative becomes the foundation of a modern distressed asset market or another well-intentioned institution that falls short of its promise.
If Bangladesh gets these institutional foundations right, the Act could mark the beginning of a healthier banking system, stronger credit discipline and a more resilient financial sector.
Zahid Hussain is a former lead economist of the World Bank, Dhaka Office
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