What we learn from City Group loan debacle

City Group has long been regarded as one of Bangladesh’s most successful local conglomerates. From edible oil and consumer goods to commodities and manufacturing, it built its reputation on entrepreneurship, market insight and execution. With annual revenue estimated at around Tk 32,000 crore and nearly 25,000 employees, the group became a symbol of local business success.

Today, the same conglomerate is at the centre of a banking sector rescue effort involving 36 banks and more than Tk 26,600 crore in outstanding loans. Although lenders believe City Group remains fundamentally viable, the need for a coordinated restructuring raises two questions: what pushed one of the country’s strongest business groups into financial stress, and what lessons can other conglomerates learn?

The answer lies not in a single event but in the convergence of several factors: aggressive diversification, excessive bank borrowing, taka depreciation, investments with long gestation periods, persistent energy shortages and the absence of the visionary leadership that once guided the business.

One of the biggest mistakes successful conglomerates make is assuming expertise in one industry automatically translates into success in another. Many groups expand beyond their core competencies after accumulating substantial cash flows. Over time, management attention becomes fragmented, capital allocation weakens, and profitable businesses subsidise weaker ventures. Financiers also turn a blind eye when times are good.

City Group appears to have followed a similar path. In recent years, it moved beyond its traditional trading and consumer goods businesses into capital-intensive sectors requiring large upfront investments and lengthy payback periods. Such diversification creates long-term opportunities but also increases financial vulnerability when financed mainly through debt.

Another contributing factor is the use of bank-funded liquidity for projects that do not generate immediate cash flows. Working capital facilities are designed to finance imports, inventories and daily operations. Using short-term financing for long-term investments creates a mismatch between repayment obligations and cash generation. Although new projects may eventually become profitable, banks expect repayments from the outset. As investment commitments increase, businesses often depend on fresh borrowing to sustain operations, weakening liquidity even when the underlying businesses remain profitable.

The depreciation of taka intensified these pressures. For companies dependent on imported raw materials, commodities and capital machinery, exchange rate losses increased financing requirements. Loans that initially appeared manageable became much larger in local currency terms, while import costs and working capital needs rose sharply. Highly leveraged companies can then enter a dangerous cycle. Additional borrowing becomes necessary not for expansion but to maintain operations. Eventually, banks reach their exposure limits, making fresh credit difficult and triggering a liquidity crisis.

Leadership transition may have compounded these challenges. In many family-owned conglomerates, the founder serves not only as chief strategist but also as the ultimate authority on capital allocation, risk management and lender relationships. Institutional systems often appear stronger than they are because so much depends on one individual’s judgment and credibility.

When such a leader is no longer present, succession challenges emerge. Expansion projects launched during periods of optimism become harder to manage, while strategic priorities become less clear. Many family-owned business groups worldwide have struggled during leadership transitions, not because successors lack ability, but because no single individual commands the same confidence among banks, suppliers, investors and employees.

The City Group episode offers important lessons for Bangladesh’s corporate sector and lenders. Growth should remain aligned with managerial capability, core competencies, sustainable cash flows and prudent capital structures. Excessive reliance on bank borrowing, particularly for long-term investments, can leave even successful businesses financially fragile.

For policymakers, bankers and business leaders, the objective should extend beyond rescuing one conglomerate. The greater challenge is to build a corporate sector supported by stronger governance, diversified financing, disciplined risk management and institutional leadership.

The writer is a banker and an economic analyst