To reduce non-performing loans, banks must strengthen their legal divisions
Government initiatives alone cannot halt non-performing loans unless financial institutions build robust legal teams to ensure prompt legal actions, effective case monitoring, and strategic coordination with panel lawyers
Bangladesh has the highest bad loan or non-performing loan (NPL) ratio in Asia, with defaults surging to 20.2% of total outstanding loans in 2024, according to a report published by the Asian Development Bank (ADB) in August 2025.
The ratio spiked to 24.13% in the first quarter of 2025 after previously hidden vulnerabilities were exposed, and the volume has continued to rise since Bangladesh Bank tightened loan classification rules to align with Basel III standards.
Lawsuits are likely the banks' last resort to curb this distressing level of NPLs. Money Loan Courts were established under the Money Loan Court Act 2003 with the aim of resolving defaulted loan cases and ensuring the swift recovery of NPLs.
Keep updated, follow The Business Standard's Google news channel
According to Bangladesh Bank's Roadmap to Reduce Classified Loans, Tk1.78 trillion was tied up in 72,543 cases in Money Loan Courts as of February 2024, and this figure has grown since then. Additionally, a significant number of defaulted loan cases are pending before the Supreme Court, resulting from challenges at various stages of the recovery process.
Against this backdrop, the Government of Bangladesh and Bangladesh Bank have undertaken initiatives to curb the significant threat posed by NPLs. The government has established five additional Money Loan Courts in Dhaka and Chittagong to expedite the disposal of pending cases and rein in NPLs. Acknowledging the shortcomings of the current legal framework for resolving NPLs, the government has also prepared drafts of the Money Loan Court Ordinance 2025 and the Insolvency and Bankruptcy Ordinance 2025.
Undoubtedly, these initiatives alone cannot halt the rising number of NPLs unless financial institutions develop robust legal teams led by competent and experienced professionals to ensure prompt legal action, effective case monitoring, and strategic coordination with panel lawyers.
Bangladesh Bank has directed banks to appoint a sufficient number of qualified officials according to the volume of pending cases and the amounts involved. At least one-third of these officials must hold a law degree and have relevant banking experience. Its panel lawyers should hold a bachelor's degree in law from a recognised university, be enrolled advocates, and members of the relevant regional Bar Association, with at least three years of active practice in relevant areas.
Delays in legal follow-up, weak coordination, and inadequate legal infrastructure within banks have contributed to prolonged loan defaults and recovery bottlenecks. In response, Bangladesh Bank's Banking Regulation and Policy Department issued BRPD Circular No. 14 on 4 August 2024, directing banks to enhance the efficiency and capacity of their legal divisions to curb NPLs, reduce case backlogs, and expedite the recovery of defaulted loans.
Through this circular, Bangladesh Bank instructed all scheduled banks to reorganise their legal divisions with a robust structure, competent leadership, and clearly defined accountability mechanisms. The circular emphasised the appointment of Chief Legal Officers (CLOs) reporting directly to the Managing Director. A CLO must hold a Bachelor of Laws (LL.B.) degree from a recognised university, have at least five years of experience within a bank's or financial institution's legal department, and possess a minimum of 10 years' experience handling relevant legal cases.
In addition, banks have been directed to appoint a sufficient number of qualified officials according to the volume of pending cases and the amounts involved. At least one-third of these officials must hold a law degree and have relevant banking experience.
Bangladesh Bank also mandates that banks' panel lawyers hold a bachelor's degree in law from a recognised university, be enrolled advocates, and members of the relevant regional Bar Association, with at least three years of active practice in relevant areas.
It is undeniable that the surge in NPLs threatens financial stability and economic development, stemming from procedural delays in case disposal, systemic flaws, and gaps in the legal framework for loan recovery.
Tangible progress in curbing defaulted loans and restoring discipline in the banking sector can be achieved only through prompt legal action, effective case monitoring, and strategic coordination by a robust legal team. Therefore, it is imperative that banks strengthen their legal divisions with sufficient and qualified officials, establish clear reporting mechanisms, and adopt performance-driven accountability systems, as emphasised by Bangladesh Bank in its recent directives.
Shoriful Islam Rumi is an advocate and works as a legal official in a private commercial bank.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
