BB introduces separate rules for banks and finance companies to recover defaulted loans

Bangladesh Bank has introduced separate rules for banks and finance companies regarding the withdrawal of lawsuits by borrowers seeking policy support to repay defaulted loans.

Under the rules for banks, borrowers must withdraw writ petitions and other lawsuits filed against the concerned bank, Bangladesh Bank and the government before their applications for policy support can be considered. They must also submit an affidavit confirming the withdrawal of the cases. However, banks are prohibited from providing borrowers with any advance written assurance that they will receive the requested policy support.

In contrast, borrowers of finance companies can obtain written in-principle approval after their applications and business viability have been assessed. They must then complete the legal process of withdrawing the lawsuits and submit the required affidavit.

Bangladesh Bank issued two separate circulars outlining the requirements under the Bank Company Act, 1991, and the Finance Company Act, 2023.

The circular governing banks was issued on 29 July under Section 45 of the Bank Company Act, 1991, while the directive for finance companies was issued on 17 August under Section 41 of the Finance Company Act, 2023.

The differing conditions have raised questions among stakeholders, particularly over why borrowers of finance companies can secure in-principle approval before withdrawing their lawsuits, while bank borrowers must withdraw their cases before their applications are even considered.

Concerns over uncertainty

Under the rules for banks, borrowers face uncertainty because they must withdraw their lawsuits without receiving any written assurance that their applications for policy support will be approved.

Stakeholders fear the requirement could discourage borrowers from applying for the facility, potentially undermining efforts to recover defaulted loans.

The rules for finance companies, however, offer borrowers greater certainty. Once a borrower receives written in-principle approval and subsequently withdraws the lawsuits and submits the required affidavit, the terms of the approved policy support cannot be changed.

The initiative is aimed at accelerating the recovery of defaulted loans and reducing the growing backlog of loan-related lawsuits.

Lengthy litigation hampers loan recovery

Prolonged legal proceedings over loan recovery remain a major challenge for Bangladesh's banking sector.

More than 72,500 cases involving over Tk1.78 lakh crore were pending before money loan courts as of February 2024, according to a report by a relevant task force.

The dispute between Janata Bank and Green Tanneries illustrates the delays associated with loan-related litigation. The case, involving Tk18 crore, was filed in 2004 but remained unresolved in 2026 despite 104 hearings.

According to the report, a six-month stay order issued by the High Court in the case remained in force for nearly eight years.

Meanwhile, bank loans worth Tk1,82,419 crore remained tied up at the end of 2025 because of court stay orders, according to relevant data.

Bankers and financial experts say prolonged litigation and court-ordered stays are significantly delaying loan recovery. They argue that effective measures are needed to expedite the disposal of cases and enable banks to recover outstanding dues.

Shahjalal Islami Bank Managing Director Mosleh Uddin Ahmed, Bangladesh Institute of Bank Management (BIBM) Director General Dr Md Ejazul Islam, and Bangladesh Bank Executive Director and spokesperson Arif Hossain Khan have also commented on the issue.

Tk60,000 crore incentive fund under review

Meanwhile, Bangladesh Bank is considering changes to a Tk60,000 crore incentive fund introduced to boost credit flows.

Loans under the fund carry a maximum interest rate of 7%, with an employment-generation target of 2.5 million.

However, loan disbursement has remained sluggish even four months after the initiative was launched. In response, the central bank is considering relaxing certain conditions and lowering the interest rate to encourage greater participation.

The effectiveness of these initiatives will depend on their implementation, the faster resolution of loan-related disputes and stronger recovery efforts by banks and finance companies.