The pandemic is cooling the demand for foreign currency loans

Low investment and a declining trend in import growth amid the ongoing pandemic are the main reasons for weak demand

Demand for foreign currency loans through lenders’ offshore banking units (OBUs), which has become increasingly popular due to lower interest rates, has slowed due to the sharp drop in imports during the ongoing pandemic.

In the first four months of fiscal 2020-21, imports fell 13 percent year-on-year to $ 15.8 billion, according to the Bangladesh Bank.

The downward trend in imports and the overall nervous outlook are due to subdued demand for loans from OBUs, a branch of banks that issue foreign currency loans, said Emranul Huq, chief executive officer of Dhaka Bank.

Individuals or institutions can take out short-term foreign currency loans from the OBUs at the rate of LIBOR plus 3.5 percent, which is much lower than the taka denominated loans.

LIBOR, which stands for London Interbank Offered Rate, is a reference rate at which large global banks grant each other loans on the international interbank market for short-term loans.

The three-month LIBOR is 0.23 percent and the one-year LIBOR is 0.34 percent.

The origins of offshore banking in Bangladesh go back to 1985. In order to make this credit channel more disciplined, however, the BB issued a comprehensive guideline for OBUs on February 25 last year.

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 out by deferring payment against letters of credit. The term of the loan is usually one year, and the interest rate has never exceeded the 6 percent mark.

The interest rate on loans has been 9 percent since April, but was previously in double digits.

Low investment and a declining trend in import growth amid the ongoing pandemic are the main reasons for the weak demand for foreign currency loans

TareqRefatullah Khan, deputy managing director of BRAC Bank, one of the pioneers of the OBU.

The multinational corporations and garment factories raise most of the foreign loans through the OBUs, he said, adding that due to the subdued economic climate for the global coronavirus pandemic, entrepreneurs are not expanding their businesses or looking to expand their factories.

Basically, importers take out short-term loans from the OBUs for payment, but import growth has declined sharply this year, Khan said.

Negative import growth in the current situation suggests stagnating economic activity, said Zahid Hussain, a former senior economist with the World Bank’s Dhaka office.

Investment-related imports such as capital machines and industrial raw materials have declined significantly due to the pandemic

“There will be no sustained economic recovery from the recession in the next six months,” added Hussain.

Credit demand wouldn’t spike until March next year as the economy has not fully recovered from the crash landing carried out for the two and a half month nationwide shutdown to smooth the coronavirus curve, Syed Mahbubur Rahman said. Managing Director of the Mutual Trust Bank.

Loans from international lenders are a great source of funding in the OBU.

The default credit rate is very low in offshore banking as the units’ borrowers have top-notch ratings, industry officials said.

In September of this year, the default loans of the OBUs amounted to 451.3 billion Tk, which, according to the central bank, corresponds to 0.7 percent of the total loans disbursed.

The OBUs have a provision bottleneck of Tk 159.6 crore.

According to Khan of BRAC Bank, banks with good ratings in the sector can raise funds at low interest rates from international lenders.

On June 18, the central bank relaxed the rules to allow banks to transfer more money from their domestic operations to OBUs.

According to the central bank announcement, banks could transfer up to 30 percent of their total regulatory capital to OBUs, up from the previous 20 percent.

The BB also relaxed the rules for foreign currency loan borrowing from OBUs by the bank’s non-Bangladeshi subsidiaries.

A bank’s own subsidiary can now obtain loans without a letter of credit from a licensed bank abroad with an acceptable credit rating or foreign currency that have been imported from abroad and deposited with a bank in Bangladesh and are required for legal entities that are not in Bangladesh are resident.

Offshore banking with non-Bangladeshi legal entities involves nothing more than taking deposits and loans, according to the BB.

Also, with approval from BB’s Foreign Exchange Investment Department, banks may, as part of their offshore banking operations, issue loans or advances to non-Bangladeshi legal entities, provided that requirements are met to cover the entire amount of the loan or advance.

On May 27 last year, the central bank revised its policy to allow local industrial companies to take out foreign currency loans from OBUs.

Applications for approval of offshore banking loans to resident industrial companies must be submitted to the Foreign Exchange Investment Department, not the Banking Regulation and Policy Department.

For OBUs, the banks must maintain a minimum reserve rate of at least 2 percent with the BB every two weeks, whereby at least 1.5 percent of the average total demand and the time obligations of the OBUs must be provided daily.

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