The demand for foreign currency loans by way of lenders’ offshore banking units (OBUs), which was gaining popularity for the lower interest rates, has slowed down owing to the sharp fall in imports during the ongoing pandemic.
In the first four months of fiscal 2020-21, imports dropped about 13 per cent year-on-year to $15.8 billion, according to data from the Bangladesh Bank.
The declining trend of imports and the overall nervous outlook are to blame for the subdued demand for loans from the OBUs, an arm of banks that give out loans in foreign currency, said Emranul Huq, managing director of Dhaka Bank.
Individuals or institutions can take short-term foreign currency loans from the OBUs at the interest rate of LIBOR plus 3.5 per cent, which is much lower than the taka-denominated loans.
LIBOR, which stands for London Interbank Offered Rate, is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.
The three-month LIBOR is 0.23 per cent and the one-year LIBOR 0.34 per cent.
The origins of offshore banking in Bangladesh dates back to 1985. But with the view to bringing in discipline to this lending channel, the BB on February 25 last year issued a full-fledged policy for OBUs.
Currently, 36 banks including Agrani, AB, BRAC, Dhaka, Mutual Trust, HSBC, Standard Chartered, Social Islami, City, Trust, NCC and One have OBUs.
Usually, the loan is taken through deferring the payment against letters of credit. The tenure of the loans tends to be one year and the rate of interest never crossed the 6 per cent-mark.
Since April, the interest rate on loans is 9 per cent but it was in the double-digits before that.
Low investment and declining trend of import growth amid the ongoing pandemic are the main reasons behind the lacklustre demand for foreign currency loans, said
TareqRefatullah Khan, a deputy managing director at BRAC Bank, one of the pioneers in OBUs.
The multinational companies and garment factories take most of the foreign loans through the OBUs, he said, adding that entrepreneurs are not expanding their businesses or going for factory expansion owing to the subdued state of the economy for the global coronavirus pandemic.
Basically, importers take short term loans from the OBUs for payment but this year, the import growth has fallen sharply, Khan said.
The negative import growth in the current situation indicates the stagnated economic activities, said Zahid Hussain, a former lead economist of the World Bank’s Dhaka office.
Investment-related imports like capital machinery and industrial raw material have dropped significantly owing to the pandemic
“There will not be any sustainable economic recovery from the recession for the next six months,” Hussain added.
Credit demand would not increase much until March next year as the economy has not made full recovery from the crash landing made for the two-and-a-half-month-long countrywide shutdown to flatten the curve on coronavirus, said Syed Mahbubur Rahman, MD of Mutual Trust Bank.
Credit from international lenders is a big source of funds in the OBU.
The rate of default loans is very low in offshore banking because the borrowers of the units are top-rated, said industry people.
As of September, this year, the OBUs’ default loans stood at Tk 451.3 crore, which 0.7 per cent of the total disbursed loans, according to the central bank data.
The OBUs have a provisioning shortfall of Tk 159.6 crore.
The banks that have good ratings in the sector can collect funds at low rates from international lenders, according to Khan of BRAC Bank.
On June 18, the central bank eased rules to allow banks to transfer more funds from their domestic operations to OBUs.
As per the central bank notice, banks would be able to transfer up to 30 per cent of their total regulatory capital to OBUs, up from the previous 20 per cent.
The BB also eased rules on taking foreign currency loans from OBUs by the bank's own subsidiaries not resident in Bangladesh.
A bank's own subsidiary now can avail loans without the letter of credit from a licensed bank abroad with an acceptable credit rating or foreign exchange brought in from abroad and deposited in a bank in Bangladesh, which are required for the juristic persons not resident in Bangladesh.
Offshore banking transactions with the juristic persons not resident in Bangladesh shall include nothing other than accepting deposits and borrowings, the BB said.
But with permission from the Foreign Exchange Investment Department of the BB, banks, as part of their offshore banking, may also make loans or advances to the juristic persons not resident in Bangladesh provided that the full amount of loan or advance is covered by requirements.
The central bank on May 27 last year revised its policy to allow local industrial enterprises to take foreign currency loans from OBUs.
Applications for approval of loans from offshore banking to resident industrial enterprises have to be submitted to the foreign exchange investment department, not to the banking regulation and policy department.
For OBUs, banks are required to maintain a minimum 2 per cent cash reserve ratio with the BB on a bi-weekly average basis with a provision of minimum 1.5 per cent daily of the average total demand and time liabilities of OBUs.
