The legal framework for handling non-performing loans (NPLs) in Bangladesh has become dysfunctional, allowing wilful defaulters to exploit loopholes and delay repayment, according to a report by the task force on economic reforms.
The report, titled 鈥楾ask Force Report on Re-strategising the Economy and Mobilising Resources for Equitable and Sustainable Development鈥�, was presented by planning adviser Wahiduddin Mahmud to chief adviser Professor Muhammad Yunus on 30 January.
Distressed assets in Bangladesh鈥檚 banking sector surpassed Tk聽6.75 lakh crore at the end of FY24, an amount equivalent to the cost of 13.5 Dhaka Metro systems or 22.5 Padma Bridges, according to a draft White Paper released in December.
Distressed assets include non-performing loan, rescheduled, restructured, written-off, and litigated loans. The review of the White Paper puts the banking sector on top of the most corruption-ravaged sectors.
With Tk聽1,78,277 crore stuck in 72,543 cases as of February 2024, the backlog of cases under the Money Loan Court Act and the Bankruptcy Act has severely hindered efforts to resolve bad loans, according to the task force report.
The Money Loan Court Act, 2003 mandates post-litigation mediation rather than pre-litigation arbitration, making settlements difficult once disputes escalate, it said.
According to the task force report, defaulters have misused this provision to prolong cases, while the requirement for banks to sell collateral before filing lawsuits further complicates debt recovery.
Defaulters usually obtain stay orders from the High Court and delay the course of justice.
The low judge鈥損opulation ratio and insufficient courtroom facilities have created a bottleneck in resolving NPL-related cases, the report said.
The Bankruptcy Act, 1997, which only applies to individuals and not businesses, leaves major corporate defaulters beyond legal reach.
Over the years, legal reforms have favoured politically connected bank directors rather than strengthening governance.
Amendments to the Bank Company Act in 2018 allowed more family members to serve on bank boards, while a 2023 revision extended director tenures to 12 years.
A major regulatory change in April 2024, through BRPD Circular 07, further weakened accountability by revoking the group default clause, allowing subsidiaries of defaulting business groups to secure fresh loans, the task force report said.
The government鈥檚 reluctance to take punitive action 鈥� such as freezing bank accounts, liquidating assets, or blocking financial transactions 鈥� has emboldened defaulters, worsening the banking crisis, it said.
Access to timely and reliable financial data has also been restricted, creating a lack of transparency, it said.
Since 2018, critical bank-specific data on capital adequacy, asset quality, and liquidity have not been publicly released, while many weak banks have failed to disclose mandatory financial statements under BASEL III standards, the report said.
Arbitrary loan classification changes have further distorted the real NPL situation, often contradicting IMF guidelines, it added.
The crisis, long concealed under regulatory opacity and political influence, came into sharper focus after the mass protests of July 2024, it claimed.
Bangladesh Bank data showed that the NPLs shot up by more than Tk聽1 lakh crore to Tk聽2,84,977 crore in September from Tk聽1,82,295 crore at the end of March.
About 17 per cent of total bank loans 鈥� amounting to Tk 16.82 lakh crore 鈥� are classified as non-performing, the highest ratio in South Asia.
The defaulted loan figure was Tk聽2,11,391 crore at the end of June, Tk聽1,45,633 crore in December 2023 and Tk聽1,55,398 crore crore in September 2023.
The figure has ballooned by Tk聽2,62,737 crore over the past 15 years since 2009, when the Awami League assumed power.
At that time, the total defaulted loan stood at Tk聽22,240 crore.