Distressed Asset Management Act: A bold reform that must get the institutions right

Highlights

• Draft Act creates ecosystem for managing and resolving distressed assets.
• DAMU, DAMCs and LSCs would institutionalize distressed asset resolution.
• Reform could strengthen banks, lending, liquidity and investor confidence.
• International success depends on strong governance and effective implementation.
• Valuation, transparency and institutional capacity remain critical implementation challenges.
• Strong governance can restore credit discipline and 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 is equal to the task.

Beyond loan recovery

The draft Act aims to push Bangladesh beyond conventional loan recovery practices by establishing a functioning market for distressed assets. The actual stock of such assets is uncertain, but informed estimates place it as high as half of all outstanding assets in the bank-dominated financial system.

At its centre is the proposed Distressed Asset Management Unit (DAMU), established under the administrative oversight of Bangladesh Bank. DAMU would be an independent 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. 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 specialized 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 responsible lending.

The draft Act reflects these international lessons and has the potential to generate significant benefits if implementation is sound. Banks would be able to transfer distressed assets, reduce provisioning burdens and strengthen their balance sheets. Professional asset managers could maximize 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.

Placing DAMU under Bangladesh Bank's oversight offers clear advantages—regulatory expertise, administrative efficiency and closer coordination. Yet because the government ultimately appoints the DAMU chief, whose rank will be equivalent to a BB Deputy Governor, safeguarding political neutrality and meaningful independence from both the BB board and executive influence may prove difficult in practice.

BB 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.

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. 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 proposed framework also assumes capabilities that Bangladesh is only beginning to develop, including professional loan servicers, specialist asset managers, independent valuation experts and sophisticated securitization 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 capitalization 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.

Where the reform will rise or fall

The draft Act is among the most ambitious financial-sector reforms proposed in Bangladesh in recent years. It introduces modern mechanisms that are well established internationally but largely absent from Bangladesh's current legal framework. 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 the institutional foundations are laid well, the Act could begin to unwind the political economy that has entrenched weak credit discipline and serial rescheduling. Done right, it would not only stabilize bank balance sheets but also shift the incentives of borrowers, bankers and regulators toward a more disciplined, rules-based financial system.