Though I spent my banking life with foreign banks, I was mostly half-hearted about knowing the courtroom performance of local lawyers. Many were seen arriving without having done enough homework before defending their clients.
Bangladesh banking is now at a critical juncture. With non-performing loans (NPLs) rising sharply, the question is whether stronger legal action by banks can help reverse the trend. The burden of bad loans is far heavier than in many other countries. The NPL ratio reached more than 20 percent of total loans by December 2024. More alarmingly, that ratio rose to 24 percent by March 2025 and even higher in June 2025. In state-owned commercial banks, the figure peaked at 43 percent in the second quarter of fiscal 2025.
By contrast, in Asia more broadly, the average NPL ratio is much lower. For example, banks in India reported a gross bad-loan ratio of around 2.3 percent in March 2025. In China, the ratio stood at just 1.56 percent at the end of June 2024. These comparisons underline the scale of the challenge. If other countries maintain NPLs in the 1-3 percent range, then Bangladesh, at 20-25 percent, is operating with a huge volume of distressed loans.
If government reforms alone are not sufficient, then banks must ask themselves what more they can do. Litigation and recovery processes emerge as essential parts of the solution. When borrowers stop servicing loans, steps such as court filings, asset seizures and legal enforcement become necessary. Bangladesh now has specialised money loan courts under the Money Loan Court Act 2003, along with directives by the central bank requiring banks to build stronger legal divisions. But having a court system is one thing; using it effectively is another.
When a bank spots early signs of a troubled loan, swift escalation to its legal team matters. If the legal division lacks qualified staff or monitoring systems, cases may drag. Delay means that defaults deepen, collateral values may decline, and recoveries shrink. In contrast, when a bank legal team and its panel lawyers coordinate seamlessly, reviewing in depth, filing early, tracking hearings and executing judgments, the cost of delay drops and bad loans start to shrink. International research shows that high NPLs hurt bank assets and income growth.
The regulator has prescribed specific standards. Banks must appoint chief legal officers with law degrees and experience. At least one-third of legal department staff must hold legal qualifications and banking experience. Panel lawyers must be enrolled advocates with an active practice. These requirements aim to strengthen the legal machinery inside banks. Yet structural challenges persist, including delays in filing, weak coordination between internal teams and outside counsel, overloaded courts and the increasing classification of loans under newer, stricter regulations. For example, the classification period is being reduced to three months from March 2025.
What does this mean for the banking sector? A high NPL level restricts banks' ability to lend. The Bangladesh Bank has noted that the bad loan surge is limiting banks' credit capacity. If banks are saddled with large unrecovered loans, then they must set aside more provisions, profitability suffers, capital buffers are eroded, and economic growth slows. For this reason, litigation must be treated not as a one-off measure but as part of the overall risk-management structure: monitor early, escalate quickly, litigate efficiently, recover assets and redeploy capital into new lending.
Litigation can reduce default loans, but only if banks strengthen their legal divisions, embed recovery procedures into their operations, coordinate with courts and lawyers, and act with speed and precision. Government and regulatory reforms may set the stage, but banks are the ones who must use it. If internal legal strength aligns with external legal infrastructure, then the tide of defaults can be stemmed and the economy can breathe easier. What is needed now is decisive commitment from bank boards and senior management, a clear push to invest in legal capabilities, enforce accountability and prioritise rapid recovery.
The writer is the chairman of Financial Excellence Ltd