Hidden financial strain of sister concerns

The financial sector in Bangladesh is grappling with a significant issue stemming from the unchecked proliferation of “sister concerns” within large local business groups. Unlike multinational corporations (MNCs), which usually focus on core competencies, many Bangladeshi conglomerates have expanded into numerous unrelated sectors, often without conducting proper financial analysis. This expansion, driven by the belief that “if one company can profit, so can I,” has led to a wide range of businesses spanning 10 to 50 industries. Unfortunately, most of these ventures are loss-making, with only a few achieving profitability.
This unrestrained diversification has resulted in systemic financial problems. Instead of being shut down, the loss-making concerns are propped up by the successful ones. Profitable companies obtain loans from banks, which are then used to provide intercompany loans to keep the failing businesses afloat. This practice not only weakens the profitable entities but also spreads financial strain across the entire group.
In many cases, financial statements are manipulated, using “window dressing” to disguise losses as profits, creating a false impression of financial health and enabling continued borrowing from banks. Banks are deeply entangled in this practice, as a large portion of their lending is directed at these corporate groups. The funds intended for profitable ventures are often redirected to struggling sister concerns, increasing the volume of non-performing loans (NPLs) in the banking system. Over time, this creates a growing debt burden that becomes increasingly unsustainable, with interest piling up alongside the principal.
The financial sector’s complicity in this cycle stems from several factors. Large business groups often wield significant influence, making it difficult for banks to enforce strict lending conditions. As a result, banks have turned a blind eye to the issue of intercompany loans, exacerbating the problem.
Rather than addressing the root cause, overexpansion into unrelated industries, entrepreneurs persist in funding loss-making ventures, holding out hope for an eventual turnaround. This reluctance to shut down failing businesses is driven by a mix of overconfidence, an emotional attachment to their enterprises and a refusal to admit failure.
The continued reliance on intercompany loans and the manipulation of financial statements are leading to a dangerous build-up of risk in the banking sector. Non-performing loans are a growing concern, threatening the liquidity of banks and the stability of the financial system. As losses accumulate and companies fail to generate sufficient revenue to cover their debts, the entire financial sector faces increasing pressure.
This issue poses a long-term threat to the economy. Rather than focusing on sustainable, well-managed businesses, many entrepreneurs are gambling on an eventual upturn that may never come. In the meantime, profitable companies are drained of their resources to prop up failing ventures, while banks bear the brunt of rising defaults and mounting debt.
To address this issue, a fundamental shift in mindset and business practices is required. Entrepreneurs must recognise the need for financial discipline, shutting down failing ventures rather than diverting resources from profitable businesses. Banks also need to take a more proactive role in ensuring that loans are used for sustainable ventures rather than being funnelled into loss-making entities. Stricter regulatory oversight is necessary to prevent the manipulation of financial statements and ensure that lending is based on sound financial fundamentals.
In conclusion, the proliferation of “sister concerns” in Bangladesh’s corporate sector has created a tangled web of financial mismanagement that threatens the stability of the banking system. The practice of using profitable businesses to fund loss-making ones has led to a build-up of debt, non-performing loans and financial inefficiencies. Without a change in approach — both from the business groups and the financial sector — the situation is likely to worsen, putting both individual businesses and the broader economy at significant risk.
The author is the chairman of Unilever Consumer Care Ltd and chief adviser of the board at Crown Cement Group