Businesses in Bangladeshi that have taken loans from foreign sources are now under pressure caused by the increasing LIBOR rate and appreciation of the dollar against the taka, according to a research report of Bangladesh Institute of Bank Management (BIBM).
If the exchange rate depreciates more because of these pressures, the private sector debt will become costlier, said the report unveiled at a seminar at the BIBM auditorium in Dhaka’s Mirpur on Thursday.
Importers make up most of the borrowers, which means they generally do not have any foreign currency earnings to tackle the pressure.
According to the BIBM report, private commercial borrowing from foreign sources nearly trebled between 2013 and 2017.
In 2013, $4 billion was taken in loans by the private sector from foreign creditors, and the amount stood at more than $11.30 billion last year – which is a 24% increase.
At present, 24% foreign loan was borrowed by the readymade garment sector, then 21% by power, 16% sweater, 12% dyeing and knit garments, 11% textile, 5% plastics, 3% service and 2% pharmaceutical sector, said the report.
It also pointed out 11 concerns regarding private commercial borrowing, which are: foreign currency risk, moral hazard, cost of borrowing, foreign currency borrowing local business organization, loan utilization, policy uncertainty and support, verification of application, borrowing from offshore banking unit and delay in loan approval.
The keynote and the report’s findings at Thursday’s seminar were presented by BIBM Director (Research, Development and Consultancy) Prashanta Kumar Banerjee.
Bangladesh Bank Deputy Government and BIBM Executive Committee Chairman Abu Hena Mohd Razee Hassan said the central bank had approved private commercial borrowing from foreign sources following demands from local businesses, specially the importers.
“The loans were misused sometimes at the beginning. But that does not happen anymore as Bangladesh Bank strictly oversees the matter now,” he said. “Many countries faced crisis after taking foreign loans for private sector. Although, a similar situation is yet to occur in Bangladesh, we need to stay alert.”
Former Sonali Bank managing director Prof SA Chowdhury said the increase in private commercial borrowing from abroad in the past few years would have major impact on our economy in the next two or three years.
The interest rate on foreign loans is tagged with the London Inter-bank Offered Rate (LIBOR), the global standard interest rate. Typically, the interest rates are LIBOR plus 3-4%.
The three-month LIBOR rate, which mostly remained below 1% for most of the past decade, hit a nine-year high of 2.32% over the past year, which means Bangladeshi borrowers will have to pay about 2% points more.
Also, the appreciation of dollar – going up from Tk78 to Tk85 in the past year – has created more pressure on the businesses.
Dhaka University’s Finance Department Prof Shaikh Shamsuddin Ahmed said the government would have to make sure that the foreign loans were not creating any pressure on the economy.
“Approval for borrowing from foreign creditors should be given after considering remittance, export and production first,” he said.
Former Bangladesh Bank executive director and BIBM’s Supernumerary Professor Yasin Ali also emphasized Bangladesh Bank’s vigilance to ensure that foreign credits were not misused. “Otherwise, the economy will be at risk.”
BIBM Director General Toufic Ahmad Choudhury said: “There will be no liquidity crisis if the bond market is developed, and development of the government bond market is a priority for that. A planned initiative will end the liquidity crisis in the banking sector.”