Two Different Policies for Banks and Finance Companies in Recovering Defaulted Loans

Bangladesh Bank has opened the door to policy support for borrowers in an effort to recover defaulted loans and reduce the longstanding backlog of cases. However, borrowers of banks and finance companies are subject to different procedures when seeking such assistance.

For bank borrowers, withdrawing pending lawsuits and submitting affidavits are prerequisites for their applications to be considered. Finance companies, by contrast, can first assess a borrower's business prospects and issue an in-principle consent letter before the borrower withdraws legal proceedings. The difference has raised questions about whether borrowers facing similar financial difficulties are being treated unequally.

Under the instructions issued for bank borrowers, any pending writ petition or other lawsuit filed against the government, Bangladesh Bank or the concerned bank must be withdrawn. Borrowers must then submit a list of the withdrawn cases and an affidavit before their applications for policy support can be considered.

There is, however, no provision requiring written confirmation of assistance before the cases are withdrawn. As a result, borrowers risk losing their legal recourse without any guarantee that their applications will be approved.

The procedure for finance companies is different. After reviewing an application and assessing the future viability of the borrower's business, a finance company may issue an in-principle consent letter if the proposal is considered satisfactory. The borrower can then withdraw the relevant cases on the basis of that letter. The guidelines also stipulate that the terms of approved policy support or incentives cannot be changed after the affidavit is submitted.

Experts say measures to recover defaulted loans and reduce pending court cases are necessary. However, without written assurance of assistance before legal proceedings are withdrawn, borrowers could face additional risks. This could also undermine efforts to revive closed factories, create jobs and bring funds locked in the economy back into productive use.

Huge Sums Tied Up in Litigation

Loan recovery cases have long been one of the major challenges facing Bangladesh's financial sector. An editorial citing information from the Task Force on Economic Reforms stated that, as of February 2024, more than Tk 178,000 crore was tied up in over 72,500 cases in money loan courts.

Some cases remain unresolved for years because of stay orders from higher courts. One example is the loan dispute between Janata Bank and Green Tannery. A case filed in 2004 to recover a loan of Tk 18 crore remained unresolved in 2026. The case had gone through 104 hearings over 22 years.

After the matter was challenged in the High Court in 2014, a six-month stay effectively continued for nearly eight years. As a result, the bank failed to recover its dues, while the business also failed to make the expected recovery.

According to Bangladesh Bank data, bank loans covered by court stay orders amounted to Tk 182,419 crore at the end of 2025.

To reduce defaulted loans and recover outstanding funds, the central bank has introduced various forms of policy support, including one-time settlements, loan restructuring and rescheduling. However, some borrowers have continued legal proceedings against the government, Bangladesh Bank or the concerned banks while applying for such benefits.

The new instructions are intended to prevent borrowers from simultaneously seeking policy support and continuing legal battles against the relevant authorities.

Bank Borrowers Must Withdraw Cases First

On July 29, 2026, Bangladesh Bank's Banking Regulation and Policy Department-1 issued Circular Letter No. 25.

Issued under Section 45 of the Bank Company Act, 1991, the directive states that borrowers seeking government or Bangladesh Bank incentive packages or policy support must withdraw pending writ petitions or other cases filed against the government, Bangladesh Bank or the concerned bank.

Borrowers must submit a list of the relevant cases after withdrawing them. They must also provide an affidavit on non-judicial stamp paper confirming that no cases filed by them against the government, Bangladesh Bank or the concerned bank remain pending.

In effect, borrowers must abandon their legal disputes before their applications for policy support enter the consideration process.

The circular, however, does not provide detailed instructions on how quickly applications must be processed after case withdrawal, the criteria for approving assistance or the steps borrowers can take if their applications are rejected.

This lack of clarity could create uncertainty among borrowers. Questions have also emerged over what legal protection would be available to a borrower who withdraws a case but is subsequently found ineligible for policy support.

Finance Companies Can Give In-Principle Consent First

Bangladesh Bank has adopted a comparatively different approach for borrowers of finance companies.

On August 17, 2026, the central bank's Finance Company Regulation and Policy Department issued Circular Letter No. 16 under Section 41 of the Finance Company Act, 2023. The directive also aims to prevent borrowers from continuing legal proceedings against the relevant institutions while receiving policy support.

Under this procedure, the finance company first reviews the borrower's application and assesses the future prospects of the business. If the proposal is considered satisfactory, the company issues an in-principle consent letter. The borrower can then withdraw the relevant cases and submit the required affidavit and list of cases.

Another important provision states that the terms of approved policy support or incentives cannot be changed after the affidavit has been received. This gives borrowers a written basis for the proposed assistance before they withdraw their cases.

That is the key difference between the two directives. For banks, applications may be evaluated after the cases have been withdrawn. For finance companies, the application is assessed and in-principle consent is provided first, followed by case withdrawal. Consequently, bank borrowers face comparatively greater uncertainty.

What Bankers and Experts Say

Shahjalal Islami Bank Managing Director Mosleh Uddin Ahmed said Bangladesh Bank's decision was appropriate because banks had been compelled to file cases after failing to recover loans for years.

“If additional concessions are given now, defaulting customers may delay repayment to banks even further. If they want to do business, they must come to the bank,” he said.

Mosleh Uddin Ahmed added that the central bank may have considered allowing some flexibility for finance companies because giving financially distressed institutions more time could help them recover at least part of their outstanding loans.

Dr. Md. Ejazul Islam, director general of the Bangladesh Institute of Bank Management (BIBM), said loan recovery was the principal objective of the two circulars.

Separate circulars for banks and financial institutions could be justified, he said, noting that banks provide long-term financing and that this may have been a factor in considering separate instructions for them.

He also pointed to the difference in the dates on which the two circulars were issued. The initial approach may have been to require case withdrawal and affidavit submission before discussions on loan-related matters, while the later circular for financial institutions introduced a somewhat more flexible procedure.

Dr. Ejazul Islam said Bangladesh Bank could reconsider the matter if the business community raised objections or concerns.

Arif Hossain Khan, executive director and spokesperson of Bangladesh Bank, said the two types of institutions were different and could therefore have separate circulars.

“However, I do not know why the central bank issued two different sets of instructions for defaulting borrowers facing similar circumstances,” he said.

He added that he would discuss the matter with the Banking Regulation and Policy Department and provide further information later.

Incentive Fund Faces Implementation Challenges

Bangladesh Bank had announced a Tk 60,000 crore incentive fund to stimulate economic activity and increase the flow of finance to the industrial sector. The fund was intended to provide loans to industrial entrepreneurs at interest rates of up to 7%, with a target of creating employment for 2.5 million people.

However, the industrial sector's difficulties have persisted despite the announcement. Factories continue to face pressure from energy shortages and other challenges.

Four months after the package was announced, fund disbursement had yet to gain the expected momentum. The central bank was therefore exploring ways to increase lending by relaxing conditions and reducing interest rates.

Against this backdrop, the different procedures for banks and finance companies have come under renewed scrutiny. If policy support is intended not only to recover defaulted loans but also to revive businesses and preserve employment, a key question remains: will bank borrowers also receive written confirmation of assistance before being required to withdraw their lawsuits?