Bangladesh Bank Enlists 131 Firms to Check Inflated Loan Collateral

Bangladesh Bank has drawn up a formal panel of 131 valuation firms whose job will be to put an honest price on the property, machinery and other assets that borrowers offer as collateral against bank loans. The move, announced through a circular sent to the managing directors and chief executives of all scheduled banks, is the central bank's clearest attempt yet to close a loophole that has quietly fed years of loan fraud across the banking sector.

The problem the new rule is meant to fix is a familiar one to anyone who has followed Bangladesh's banking scandals. A borrower pledges a plot of land or a factory shed as security for a loan. The bank, sometimes under pressure to hit lending targets and sometimes in outright collusion with the client, accepts a valuation for that asset that bears little relation to its real market worth. A piece of land genuinely worth a few crore taka gets valued at several times that amount on paper, and the loan sanctioned against it grows accordingly. When the borrower later defaults, the bank discovers that the collateral it was counting on to recover its money is worth a fraction of what its own paperwork claimed.

How the new system will work

Under the fresh rules, banks will now have to pick from the central bank's approved list whenever a loan crosses specific thresholds. The 131 enlisted firms have been split into two tiers, Group A and Group B, based on their capacity and track record, with 98 firms placed in the higher Group A tier and the remaining 33 in Group B. For loans above one crore taka, an external valuation from one of these listed firms becomes mandatory rather than optional.

The checks get progressively stricter as the loan size grows. Once a loan crosses 100 crore taka, banks must obtain valuations from at least two separate firms, and at least one of those two must come from the higher-rated Group A. Banks that are already carrying elevated levels of bad debt face an even lower bar for triggering the extra scrutiny, with a 50 crore taka threshold applying to any lender whose non performing loan ratio sits at 10 percent or higher. The idea is straightforward, a bank that has already shown it cannot manage credit risk well should not be left to grade its own homework on collateral either.

To stop banks from simply shopping around for the friendliest number, the circular also sets a tolerance band. If two valuation reports on the same asset come back more than 20 percent apart, the bank will need to explain the gap before the loan can proceed. That single provision targets a very specific and very common trick, quietly commissioning a second, more generous valuation whenever the first one comes in too low for the loan the bank wants to approve.

Why Bangladesh Bank is acting now

The enlistment itself is not a brand new idea. It builds on a policy first issued in November 2023 that laid out minimum eligibility rules for valuation firms wanting to work with banks, covering things like professional membership, a minimum of three years of experience, qualified staff on the payroll and a clean credit history for the firm itself. What is new is that the central bank has now actually gone through the process of vetting applicants and publishing a working list, turning a paper policy into something banks are required to use in practice.

That step matters because inflated collateral has been a recurring theme in almost every major loan scandal to hit Bangladesh's banking sector in recent years. Regulators and auditors reviewing distressed banks have repeatedly found cases where the underlying asset backing a large loan was worth a small fraction of its stated value, sometimes because the valuation was done in house by staff with an incentive to approve the loan, sometimes because outside valuers were paid to sign off on numbers that were handed to them rather than numbers they actually assessed. With non performing loans still weighing heavily on the sector's balance sheets, giving banks a vetted, arms length source for these numbers is meant to make that particular kind of fraud harder to pull off.

Built in checks on the valuers themselves

Bangladesh Bank has also tried to make sure the firms on its list do not become a rubber stamp of their own. Enlistment runs for three years rather than indefinitely, forcing every firm to come back for renewal and re-vetting on a regular cycle, and applications for renewal have to be filed six months ahead of expiry so there is no gap in coverage. Listed firms are required to file an annual performance report with the central bank by 15 January each year, giving regulators an ongoing paper trail on how each valuer is actually performing rather than a one time approval that is never revisited. Bangladesh Bank has also kept the power to delist a firm mid term if it breaches the policy's conditions or is found to have acted negligently.

What it means for borrowers and banks

For genuine borrowers, the practical change is likely to be a bit more paperwork and possibly a bit more time before a large loan is approved, since valuations will need to come from a firm on the approved list rather than whichever valuer a bank has traditionally used. For banks, it removes some of the discretion they previously had in choosing who assesses the assets backing their biggest loans, which is precisely the point. Bankers who have watched successive collateral related scandals play out say the framework, if enforced consistently, could catch inflated valuations earlier in the process rather than after a loan has already gone bad and the bank is left trying to recover money against an asset that was never worth what its file claimed.

Whether the policy delivers on that promise will depend heavily on enforcement. Bangladesh's banking sector has no shortage of rules on paper, the harder test has always been whether banks apply them consistently when a valued client wants a loan approved quickly. The three year renewal cycle and the requirement for annual reporting at least give the central bank a regular opportunity to see which valuation firms are pulling their weight and which ones might be drifting back toward old habits.

A familiar pattern in the country's biggest loan scandals

The scale of the problem this policy is trying to address has shown up repeatedly in the loan defaults that have made headlines over the past decade. When forensic auditors and asset quality reviews have gone through the books of banks carrying large volumes of non performing loans, inflated collateral valuations show up as one of the most common threads connecting otherwise unrelated cases. A single overstated valuation can ripple through a bank's balance sheet for years, since the loan loss provisions a bank is required to set aside are often calculated with reference to how much the pledged asset would fetch if sold, and a valuation that was never realistic in the first place leaves that provisioning short of what the bank will actually need when the loan eventually turns bad.

Industry observers note that Bangladesh is hardly alone in wrestling with this problem, collateral based lending fraud has featured in banking crises well beyond South Asia, and regulators in several other markets have responded with broadly similar tools, an approved panel of independent valuers, tiered scrutiny based on loan size, and mandatory second opinions once exposure crosses a certain threshold. What distinguishes the Bangladesh Bank version is how directly it ties the intensity of scrutiny to a bank's own risk profile, using the non performing loan ratio itself as a trigger for tighter rules, an approach that effectively tells the weakest banks they will face the most oversight on this particular front rather than being left to police themselves.