The Non-Performing Loan (NPL) policy of financial institutions is very simple: to sue the borrowers at the Artho Rin Adalat Court for recovery of the loan, irrespective of classification. The Artho Rin Adalat Act truly shields the bankers from their liability and responsibility for default loans. The only target of the process of loan recovery has been defeated. The outcome is a pile-up of NPL of about half of the total loan disbursed. On the other hand, the Bangladesh Bank (BB) has recently allowed the restructuring of defaulted enterprises only with reschedule of the installment of default loan.
An attempt was made in 2015 to restructure some loans of big borrowers with the condition that if they fail to pay two instalments in a row, they will be marked as defaulters and will be sued. Again, in 2022, BB allowed Janata Bank to regularise the default loans of 17 entities of AnonTex Group, relaxing its own rescheduling policy with a much easier form. A defaulter was asked to pay a down payment of 10% and 50% of default loans to restructure their NPLs as per the Bangladesh Bank policy. These two plans were only a rescheduling of loans rather than the restructuring of the defaulted enterprises. Both restructuring attempts were not successful in achieving the target of operationalising the business and loan recovery.
The present governor of Bangladesh Bank (BB) reportedly has instructed banks to come up with a solution to let the City group keep operating to avoid further provision burden. This conglomerate’s outstanding loans have exceeded Tk26,600 crore. Some senior bankers from 36 banks met at Hotel Sonargaon in Dhaka on 19 June to discuss ways to keep City Group operational and consider a joint restructuring of its loans and the conglomerate. All participating bankers agreed that City Group is facing a genuine business crisis. Although its operations are under pressure, it has not siphoned money abroad. Therefore, all banks agreed on the need to help revive the company.
City Group informed the meeting of its plans to sell some of its non-core businesses to sustain operations. Based on the review committee’s findings, the banks will prepare a specific proposal and meet with the Bangladesh Bank governor to seek the central bank’s support. Banks have decided to appoint an independent auditor before moving forward with any restructuring of City Group’s loans. To ensure transparency regarding cash flows, expenditures and sales, banks plan to place representatives on City Group’s board of directors.
The Banker’s Association will request Bangladesh Bank to temporarily suspend, for this specific case, the regulatory requirement to classify any of City Group’s loan accounts as of June 30, 2026. If all 36 banks agree, they will nominate two or three representatives to sit on the board. This follows global restructuring models and waterfall mechanisms.
The restructuring framework is being designed based on global debt restructuring practices and a Cash Waterfall Mechanism (CWM). The mechanism derives its name from its visual resemblance to a natural waterfall due to the way funds are disbursed among several creditors at different stages in order of priority. CWM is based on a waterfall financial distribution model, designed to allocate cash inflows among stakeholders in an orderly manner, while prioritising the most critical payments. It is a payment system that allows debtors to pay higher–tiered creditors their full interest and principal before lower-tiered creditors receive their own principal and interest payment.
The mechanism has 4 key components that shape its operation. These are: Senior Debt Service, which addresses the highest-priority debts first to reduce the risk of default and improve credit standing, Operating Expenses, which covers crucial daily operational costs to ensure uninterrupted business operations, Reserve Accounts, where funds are set aside for future needs and emergencies, and Discretionary Spending, where remaining funds are distributed for strategic initiatives.
According to the proposed plan for restructuring the City Group, an independent monitoring committee will also be established. External restructuring consultants will be involved. The strategic roadmap includes selling non-core businesses and assets, as some of these assets have become a burden on the balance sheet because they are not generating returns. The board of directors, with a few members from the banks, will supervise the business operation with the restructured Board of Directors.
There will be a central escrow account owned collectively by the 36 banks for banking transactions. All cash flows will go into that account under a waterfall mechanism. An escrow account is a temporary, secure financial arrangement where a neutral third party holds funds or assets on behalf of other parties. It acts like a ‘pause button’ to reduce risk, only releasing the assets once all pre-set conditions in a contract are met.
In the global financial world, such an account is called an Amortising Synthetic Transferable Rate Option (ASTRO) account. When an ASTRO or highly structured loan defaults, it triggers a waterfall mechanism – a strict hierarchical distribution order dictating which creditors get paid back from available funds. Upon an event of default, the underlying cash flows or the liquidation of pledged assets are distributed based on a strict seniority ladder. Cash flows ‘spill’ down to lower tiers only after the obligations of the higher tiers are paid in full. For structures like ASTRO transactions, the waterfall is often governed by an Intercreditor Agreement (ICA).
In the case of the City Group case, by an Intercreditor Agreement (ICA), the bankers have decided that if goods worth Tk100 are sold, the amount will first be deposited into the escrow account controlled by the syndicate of Bankers. From that Tk100, perhaps Tk80 will be returned to City Group as working capital, while Tk20 will be allocated towards loan repayment. This is the first time banks have collectively restructured a stressed corporate account through an escrow arrangement and coordinated oversight.
The Cash Waterfall Mechanism (CMM), as noted, is an essential financial model for governments aiming to instill financial discipline in Bangladesh’s financial sector. Despite its advantages, the implementation of a CWM is obstructed by some challenges and complexities likely to impede its objectives. Consensus building and understanding among participating stakeholders of 36 banks is critical to the success of the mechanism, as without it, the interpretation of revenue disbursement among stakeholders can vary, resulting in different conclusions and decisions under the mechanism.
Moreover, a proper system for the regular review, adjustment, and evaluation of the effectiveness of the CWM must be put in place to periodically monitor progress or otherwise make and recommend solutions. Additionally, there should be measures in place to regularly hold a comprehensive consultation with stakeholders to update them on pressing issues of the mechanism and solicit their input for the enhancement of the mechanism to effectively meet sector demands.
CWM is more than just a financial model. It is a strategic framework that policymakers and regulators can harness to introduce financial discipline in Bangladesh for the rescue of our distressed financial sector. City Group may be a case study and the CWM should be brought into the legal framework, but only with instructions from the governor of the central bank.
The views expressed in this article are solely those of the author
The writer is a CEO, Bangla Chemical & Legal Economist. E-mail: [email protected]
