The writer, having a background in foreign banking, observed a lack of preparation among local lawyers in court proceedings. Bangladesh’s banking sector faces a critical phase with a surge in non-performing loans (NPLs), prompting the need for more robust legal actions by banks to address the escalating trend. The country’s NPL ratio surpassed 20% by December 2024, climbing further to 24% by March 2025, and even higher by June 2025. State-owned commercial banks notably experienced a peak NPL ratio of 43% in the second quarter of fiscal 2025.
In comparison, the NPL ratios in other Asian countries like India and China are significantly lower, highlighting the magnitude of the challenge faced by Bangladesh. While India reported a gross bad-loan ratio of about 2.3% in March 2025, China’s ratio was just 1.56% by June 2024. The stark contrast shows that Bangladesh’s NPLs, ranging from 20-25%, signify a substantial volume of distressed loans.
To combat this issue, banks need to explore additional measures beyond government reforms. Legal proceedings and recovery processes are crucial components of the solution. Early detection of troubled loans and prompt involvement of the legal team are essential to mitigate defaults, prevent further decline in collateral values, and enhance recovery rates. Effective coordination between bank legal teams, panel lawyers, and the court system is vital to expedite the litigation process and reduce the burden of bad loans on bank assets and income growth.
Regulations mandate banks to enhance their legal divisions by appointing qualified chief legal officers and ensuring a specified percentage of legal department staff possess legal and banking expertise. However, operational challenges such as delays in filing, inadequate coordination, and regulatory changes continue to pose obstacles. The reduction of the loan classification period to three months from March 2025 adds further complexity to the situation.
High NPL levels constrain banks’ lending capacity, as noted by the Bangladesh Bank, leading to increased provisions, reduced profitability, erosion of capital buffers, and a slowdown in economic growth. Therefore, a proactive approach to litigation, integrated with robust risk management practices, is crucial for banks to navigate these challenges successfully.
By strengthening internal legal capabilities, streamlining recovery procedures, fostering collaboration with external legal entities, and acting swiftly, banks can effectively reduce default loans and support economic stability. The commitment of bank boards and senior management to invest in legal expertise, ensure accountability, and prioritize efficient recovery processes is paramount for addressing the NPL crisis and fostering sustainable economic growth.