Exposure to external borrowings must be reviewed



– Nikkei Asia

IT IS said that capital account transactions are restricted in Bangladesh. External borrowing is one of the capital account transactions for which the approval of the relevant authorities is required. Foreign borrowing by resident enterprises must be approved by the Bangladesh Investment Development Authority, which, in a notification issued in 1998, states that all foreign borrowing proposals by private sector industrial enterprises in Bangladesh must be authorized.

Borrowings are classified into different categories: supplier credits, financial loans from institutions or individuals and debt issues on the foreign capital market. The notification authorizes the central bank to extend short-term credit for up to one year from suppliers or buyers, or both, abroad.

When considering requests for approval of loan proposals, the Investment Development Authority gives priority mainly to medium and long-term loans for the installation of new capacities and for the modernization or expansion of existing capacities. production of goods and services for export or domestic use. Borrowing abroad to build up excess capacity in relation to foreseeable immediate or medium-term needs and borrowing for expenditure of a speculative nature in sectors such as real estate or commercial office buildings are discouraged. Short-term borrowing proposals but for those which are temporary necessities and unavoidable as bridging arrangements before the finalization of a medium or long-term loan approved by BIDA will not normally receive favorable consideration, the statement adds. notification.

The notification specifies that requests for loan proposals must be supported by analyzes and documents concerning the commercial viability of the project; the capacity of the project to service the proposed debt with the project income streams; the cost-competitiveness of the project’s achievements on the internal and external markets; the existing production capacity in Bangladesh in the industrial sector to which the borrowing proposal relates and the potential demand in the domestic and export markets given the estimated production cost structure; and the existing debt structure of project sponsors supported by credit reports, including their creditworthiness. The interest rate and other costs associated with the loan will be reasonable in relation to the loan rates in effect on the international market in the currencies concerned for the mandate concerned.

The notifications classify external borrowing into three types: supplier credits, buyer credits and credits through debt instruments. The third category is not well practiced in Bangladesh. Even the market for debt instruments like bonds is not deep. The authorities concerned would work there to develop the capital market.

In accordance with the notification from BIDA, the proceeds of the loan against external borrowing is used to meet external payments. Local payments are rarely allowed outside the fund. Under supplier credit, foreign suppliers provide goods such as capital goods, equipment, etc. At the end of the loan term, the importers / borrowers make the payments. In the actual model of supplier credit, transactions between supplier-lenders and importer-borrowers are executed through sales contracts. But in the event that supplies are made by way of letters of credit, the lenders take exposure to the letters of credit, not the borrowers. This mode of transaction degrades the basic concept of supplier credit. Transaction risk is exposed to banks that issue letters of credit in Bangladesh.

External lenders provide loans to borrowers in Bangladesh. The proceeds of the credits are used to settle import payments. Lenders should definitely get exposure to borrowers in Bangladesh. But the concept will change if the transactions are executed in the form of letters of credit. In this case, banks open letters of credit with deferred terms on the condition that payment is made on demand by certain lenders. Based on the acceptance of import invoices by banks in Bangladesh, lenders make payment to foreign suppliers. This mode of transaction exposes our banks to an external credit risk. They face payment obligations in the event of default by importers-borrowers.

As previously stated that the 1998 notification empowers the central bank to accept short-term loans of up to one year from overseas supplier-buyers, central bank regulations in this regard show that Banks can open letters of credit on a deferred payment basis for importing machinery, equipment, industrial raw materials and other items for up to 360 days depending on the currency conversion cycle. As part of the transactions, foreign suppliers depend on payment commitments from banks in Bangladesh in the form of letters of credit.

Loans from external sources for the settlement of import payments constitute external borrowing by resident enterprises. It essentially falls into the category of buyer credits if the credit exposure relates to borrowers. But what if local banks are exposed to transactions and if foreign lenders resort to letters of credit is a problem. It is an external loan, but the borrowers are literally the banks. Liabilities are well placed on banks’ balance sheets. These commitments are also available in the balance sheets of resident companies. Whatever the situation, banks are responsible in the first place if the loan is executed against letters of credit or stand-by letters of credit or bank guarantees or comfort letters issued by banks.

Another mode of external borrowing is executed on behalf of the export credit agency credit. As part of this agreement, the foreign export credit agency provides guarantees to external lenders. On the basis of guarantees, lenders grant loans to resident businesses. It’s a simple equation: it seems to channel credit to borrowers. In this case, two types of banking services are concerned. Designated banks operate as transactional services to repatriate loan proceeds. Banks’ offshore banking services provide payment commitments to export credit agencies. On the basis of these payment commitments, export credit agencies provide guarantees to lenders abroad. A portion of the interest income on the loans goes to export credit agencies. But the benefits received by offshore banking services would have been very insignificant. The actual exposures are taken by the local banks. Their off-balance sheet shows commitments for credits from export credit agencies.

External credit in any form – buyer credits, supplier credits or ECA credits – is exposed to banks. In the truest sense of the word, such a way of borrowing by resident companies is nothing more than external borrowing by banks. It is a risky game provided the banks get insignificant collateral from the end borrowers.

As previously stated, capital account transactions are not opened in Bangladesh. The Foreign Exchange Regulation Act 1947 considers sureties, guarantees, among others, to be transactions on the capital account. The law requires that capital account transactions be specified, with prescribed restrictions. By issuing one-year letters, the foreign exchange regulatory framework allows payment bonds / guarantees. But the long-term risks exposed by the banks are a risky game for the banks and the country.

Recently, the central bank issued a notification ordering banks to seek approval from the central bank for issuing bank guarantees, standby letters of credit, etc. against external loans approved by the Investment Development Authority. Applications to the central bank are subject to compliance with specified conditions. It requires banks to take collateral, at least 5 percent of the collateral amount, in the form of cash margin or unencumbered cashable bank deposits, among others. But no such safeguard is available for the issuance of long-term letters of credit against external borrowing by resident enterprises with the approval of the competent authorities.

Without administratively enforced safety clauses, there are opportunities for players to avoid unhealthy appetite for credit standards. Alternatively, while accommodating requests for external loans, the approval authority should specify conditions for the designated banks to the effect that they will maintain security measures to cover their exposures, in the case of transactions to be executed. under long-term letters of credit.

Tashzid Reza works in a trade finance company acting as a liaison office in Bangladesh.


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